Granules India Ltd (NSE: GRANULES) Q3 FY23 Earnings Concall dated Jan. 24, 2023
Corporate Participants:
Irfan Raeen — Investor Relation Advisor
Krishna Prasad Chigurupati — Chairman & Managing Director
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Mukesh Surana — Chief Financial Officer
Priyanka Chigurupati — Executive Director and GPI
Analysts:
Apurva Bahadur — Goldman Sachs — Analyst
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Yogesh Tiwari — Arihant Capital Markets Limited — Analyst
Sajal Kapoor — Independent Investor — Analyst
Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst
Pujan Shah — Congruence Advisers — Analyst
Darshil Jhaveri — Crown Capital — Analyst
Tushar Bohra — MK Ventures — Analyst
Anirudh Gangahar — Avendus Wealth Management — Analyst
Harith Ahmed — Avandus Spark — Analyst
Presentation:
Operator
Ladies and gentlemen, good day and welcome to the Granules India Limited Q3 and Nine M FY23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. [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, sir.
Irfan Raeen — Investor Relation Advisor
Thank you, moderator. 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 Limited, I extend a very warm welcome to all participants on Q3 and nine-month FY 23 financial result discussion call. Today on the call, we have Dr. Krishna Prasad sir, Chairman and Managing Director; Dr. KVS Rama Rao sir, Joint Managing Director and Chief Executive Officer; Ms. Priyanka Chigurupati, Executive Director, GPI and G USAl; Mr. Mukesh Surana, Chief Financial Officer; Mr. Puneet, GM, Business Finance and Investor Relation.
I hope everyone had an opportunity to go through our investor deck and press release that we have uploaded on exchanges and on company’s website. I would like to give a short disclaimer before we start the call. This call may contain some of the forward-looking statements which are completely based upon our beliefs, opinion, and expectation as of today. These statements are not a guarantee of our future performance and involve unfortunate risks and uncertainties. With this, I hand over the call to MD sir. Over to you sir. Thank you.
Krishna Prasad Chigurupati — Chairman & Managing Director
Thank you, Irfan. A very good evening to all of you, ladies and gentlemen, and thank you very much for attending our Q3 earnings call today. As you are all aware, Mr. Mukesh Surana has joined us as our new CEO, and this will be his first call, and I’m glad to introduce him to you. A detailed presentation of our Q3 performance had been uploaded on our website, and I’m sure all of you would have gone through it by now. However, I will delve on a few important aspects and later, Mukesh will go into a little more detail.
Our current quarter performance had improved year-on-year. It has declined slightly compared to the sequential quarter. As I mentioned in the earlier calls, we were in the process of changing our 3PL service providers in the U.S. And though this process is now complete, the new company continues to have teething issues and missed out on quite a few deliveries to our customers.
This has not only resulted in lesser revenue but also certain trade to supply penalties, both of which had impacted our bottom line. Overall, I’m personally satisfied with our performance in Q3. We expect the 3PL performance to improve before the end of Q4. Our operational cash flow, though healthy year-on-year, there has been a decline compared to the sequential quarter. The price erosion in the U.S. continues and we keep on mitigating this by geography expansion and product mix rationalization.
The most important piece of information I want to share with you today is that we recently set the groundwork for our vision of going green, saving the planet and its people and, at the same time, generating positive returns for all our stakeholders. I want to briefly discuss the dilemma facing our world before going into further details. According to the most recent World Economic Forum study of global risk, 6 of the 10 biggest dangers of the future are all concerned and connected to our inability to reduce or mitigate climate change, all of which will result in disasters which are unthinkable.
These risks rank even ahead of global confrontation. The greater service that any individual or corporation can provide is to at least reduce this risk in their line of business. It is surprising to learn that the pharmaceutical industry is not as environmentally friendly as we may think. The CO2 equivalent emissions in 2015 were 55% higher than those from the automotive industry. I’m not sure if the pharmaceutical industry is working as quickly to reduce emissions as the automotive industry is. It is highly unexpected to learn that the emissions from the pharmaceutical businesses increased by 15% between 2020 and 2021, reaching 260 million tonnes of greenhouse gases equivalent to — carbon dioxide equivalent.
When several nations set goals to achieve carbon neutrality by the year 2050 to 2070, big pharmacies set growth between 2025 and 2030 with AstraZeneca being the most ambitious with the target date of 2025. Though this is a very positive step, these days only apply to Scope 1 and Scope 2 emissions, which [technical issue] of all the emissions in pharmaceutical manufacturing. Scope 3 generates about 80% of the emissions. And it is here that they must focus on supply chain and vendor management, neither of which are simple tasks, and then until each vendor is incentivized and motivated to work towards aggressive targets.
Further, carbon border tax, which has already started rolling out in Europe for certain products, will come into effect in many countries and also for pharmaceuticals over a period of time and buyers will have to pay for emissions caused by their vendors, which will motivate them to incentivize products with the least carbon footprint. While this is most common knowledge to most of you, I wanted to set the context for work toward reduction or elimination of greenhouse gases — gas emissions.
Many countries are working on round the clock carbon-free electricity, hydrogen, and ammonia. India is most likely to be a leader on this front. Automobiles, shipping, fertilizer, and even steel companies are working towards making a net zero by using this initiative. I was actually surprised to learn that Volvo even made a truck with green steel and run by green energy. At Granules, we always believed in reimagining existing processes, systems, convention, and beliefs. We always took the least trodden path.
Now we are reimagining chemistry. We recently entered into an MOU with Greenko one of the largest suppliers of carbon-free energy, and we’ll be partnering with them for supply of power, hydrogen, ammonia, nitric acid, and a few other chemicals, which will all be carbon-free, made with carbon-free electricity as a base. On our part, we’ll convert some of these chemicals from Greenko to raw materials required for our intermediates and APIs.
We have developed processes for this over the years, and we will not use any form of energy or any derivatives of fossil fuel in our processes. We will be located adjacent to the greenfield site and also close to their port. We will be starting with two products, paracetamol and metformin, and slowly expand into other products, which we are working on. Our target is to have products with the lowest carbon footprint from trading to port. 90% of raw materials will be made in-house at one site and there will be very negligible dependency on any other company unless they are also green.
During the process, while we maintain our current plans, current and future products which we are working on, we propose to set up additional capacities for these two products to meet more than 50% of the global requirement. Negligible emissions may happen from a small supply chain, and we plan to offset this by carbon sequestering. We are also working on developing carbon prints by forestation with select high carbon absorbing plants while still maintaining the biodiversity of the ecosystem.
I’m highly excited and could not avoid sharing a few of my thoughts and plans with all of you today. Research has shown that sustainability-driven companies had always outperformed others, and it is my strong hope that more companies or organizations will make sustainability at the heart of their operations and create value for themselves, stakeholders while also heal the planet. With this, ladies and gentlemen, I pass this over to Dr. K.V.S. Rama Rao, our Joint Managing Director.
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Thank you, Chairman. Over the last few quarters, I spoke about Granules’ long-term statutory of science, technology and innovation. Strengthening the R&D and product pipeline is key to our strategy. We have revisited our product portfolio, which will focus on reasonably short-term and medium-term commercialization. Also, the portfolio focuses on development of controlled substances, both API and formulation, and backward integration of these products. My emphasis has been on the product leveraging on the current strength of Granules in India and U.S. and also bringing in approach of global cost leadership and sustainability.
And then computation technology is an area of focus, and we have made very good progress on the select set of molecules. For these set of products, we have done work on the genetic engineering of the enzymes, interface work of enzymes and chemistry is under progress. We expect to see the first validation of our enzyme-based APIs by quarter 3 of next year. Another key product, paracetamol, the supply challenges of PAP are behind us, and we are running at full capacity.
Our focus is now geared towards significantly improving our paracetamol API capacity, along with increasing the yields through continuous process improvements. Our backward integration program [Indecipherable] and PAP are also progressing well. During the quarter, we have initiated profitability improvement programs across direct and indirect procurement, API manufacturing, finished dosage manufacturing and commercial excellence through consumption and technical levers.
We have partnered with a leading global consulting firm and several projects have been initiated and are being implemented, which will make a material impact on our profitability in short to medium term. As we have communicated, US FDA conducted a preapproval inspection of our Gagillapur facility from January 9 to 13. We have reviewed 3 Form 483 observations. The company will respond to these observations within the stipulated time period. With this, I hand it over to Mukesh, who will take us through the financial section.
Mukesh Surana — Chief Financial Officer
Good evening, everyone, and thank you, CMD and GMD. Let me take you all through the top financial parameters now. On the revenue side, the third quarter revenue was INR1,146 crores as compared to INR997 crores in Q3 of ’22 at a growth 15%. This growth is primarily attributed to increased efforts in all major geographies, including U.S.A. Revenue were flat as compared to Q3 F ’22, primarily on account of change of the retail partner, which has impacted our FD sales from GPI in the U.S. despite having orders in hand.
The sales breakup as per business verticals and regions are presented in our investor presentation, which is available on the website. On the value-add side, as a percentage to sales for Q3 F23, it was 48.4% as compared to 46.6% in Q3 F ’22. Value added as compared to Q3 F ’22 is down by 1.3%, points primarily on account of higher sales of API and lower FD sales in the U.S.A., impacted by the 3PL partner transition which I just mentioned earlier.
Along with that, we have also seen some price erosion challenges in the markets, including USA. On the EBITDA and EBITDA margin trend for the quarter. We were at INR231 crores as compared to INR174 crores in Q3 F ’22, an increase of 33% over the previous year, mainly on account of increased business across all major geographies. R&D spend for the quarter was at INR23 crores as compared to INR35 crores in Q3 F ’22. It is expected that R&D spending will be in the range of INR35 crores to INR40 crores in each quarter going forward.
Net debt on our debt was INR894 crores as compared to INR697 crores at the beginning of the year, mainly on account of reduction in cash position. We did a buyback of shares including transaction and cost, it was INR311 crores. And there is a deployment of capex funds of about INR50 crores in our new expansion plan with green initiatives in Kakinada and INR42.5 crores for land appreciation, Visakhapatnam for expansion. Cash-to-cash cycle was at 137 days in the quarter — in the current quarter as compared to 138 days at the beginning of the year and 141 days in Q3 F ’23.
Operational cash flow for the quarter was INR161crores as compared to INR23 crores in the previous years same quarter. Higher operating profit and a focus on working capital management contributed to the higher operating cash flow as compared to the previous year. Capex spend during the year was INR194 crores, including the advance paid, which I explained early, INR50 crores for the latest purchase of land in Kakinada for initiatives — green initiatives; and INR42.5 crores in Visakhapatnam.
Free cash flow this quarter has been negative at INR32.5 crores as compared to a negative of INR72 crores in the previous year same quarter. However, it was down from Q2 F ’23 where it was positive INR124 crores. So this quarter, primarily on account of a little lower operating cash flow and higher capex spend, which we have just explained earlier, has resulted in negative INR32.5 crores. ROCE for Q3 F ’23 increased to 25.6% as compared to 21.2% in Q3 F ’22. We expect improvement in ROCE year-on-year basis to continue in Q4 F ’23 despite higher spends on capex for green initiatives. With this, I open the floor for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] The first question is from the line of Apurva Bahadur from Goldman Sachs. Please go ahead.
Apurva Bahadur — Goldman Sachs — Analyst
Hi sir, thank you so much for the opportunity. Sir, wanted some clarity on the arrangement with Greenko. So if you could just throw some light on the financial viability of these projects even without CBAM, right? And what would be the type of the structure of this agreement?
Krishna Prasad Chigurupati — Chairman & Managing Director
Okay, Apurva. The reason Greenko is they supply us carbon-free electricity round-the-clock, along with certain other chemicals, like I said, ammonia, hydrogen, nitric acid which they’re producing in large quantities with export across the world. The economies are going to be — the economies of scale are going to give us a great advantage, and there will be fixed price contracts for these products. And from these products, like I said, we will be making some of the products or other raw materials and finally converting them to our APIs The advantage is there is no transportation of chemicals, it’s all in one site. And green power at a reasonable price is available round the clock and we’re also next to the port.
Apurva Bahadur — Goldman Sachs — Analyst
Okay sir, and how do the pricing at which probably Greenko will supply the chemical? does it hold against the current, say gray chemical pricing?
Krishna Prasad Chigurupati — Chairman & Managing Director
Yeah. It will definitely hold against the gray chemical pricing. And the cost of raw material chemicals, which we produce also, overall cost when you take the total cost will definitely not be more than the gray chemicals.
Apurva Bahadur — Goldman Sachs — Analyst
Including freight and all?
Krishna Prasad Chigurupati — Chairman & Managing Director
When you take into account the transportation and other costs, they’ll be the same price or possibly a little lesser.
Apurva Bahadur — Goldman Sachs — Analyst
Good to hear that, sir. Sir where is the site exactly? Sorry, you said that you will be co-located with them?
Krishna Prasad Chigurupati — Chairman & Managing Director
It’s in Kakinada.
Apurva Bahadur — Goldman Sachs — Analyst
Okay.
Krishna Prasad Chigurupati — Chairman & Managing Director
In Andhra Pradesh.
Apurva Bahadur — Goldman Sachs — Analyst
Got it sir and you said that it will be a fixed-price contract, what will be the tenure over here?
Krishna Prasad Chigurupati — Chairman & Managing Director
It will be about 10 years to start with.
Apurva Bahadur — Goldman Sachs — Analyst
Okay. Understood. And the structure as a structure, I mean, that will you be incurring the capex for the renewable capacity or the electrolyzers? Or it will be like a fixed take-or-pay type of a contract straight for the chemicals and the electricity?
Krishna Prasad Chigurupati — Chairman & Managing Director
Definitely, we are not involved in any of the capex as the first storage of energy or for the electrolyzers. It’s all their effort and the percentage, we are going to draw from them. It’s a small fraction of what they propose to manufacture. They’re going to plan a surprise to the whole world. And what we are going to take is a very small quantity.
Apurva Bahadur — Goldman Sachs — Analyst
Right. Very useful. Sir, just one last question if I may. And again, this is on the costing of the green chemicals. So now as we understand that there is an expectation that this entire, the hydrogen pricing — green hydrogen pricing will sort of see a very sharp correction over-time? Is there any risk of getting tied to a high-cost source? Say, in future, maybe it might decline quite significantly?
Krishna Prasad Chigurupati — Chairman & Managing Director
10 years is not a very long-time, Apurva, number-one and number two, when we exhibit at the pricing with our partners we have taken into account all the developments that are going to happen in the world for solar panels number one, wind turbines and most importantly, they also have calculated the efficiencies that are expected in electrolyzers. Electrolyzer technology is going through a great change, so we are very well aware of that what the future cost will be, what the current cost will be and we are very cautious in not over-committing ourselves. There we may get ourselves stuck with the higher cost.
Apurva Bahadur — Goldman Sachs — Analyst
Understood, sir. Thank you so much. All the very best.
Krishna Prasad Chigurupati — Chairman & Managing Director
Thank you.
Operator
Thank you. [Operator Instructions] The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Yeah, thanks for the opportunity. Sir, just continuing with this green initiative so which on other entities have also sort of tied-up at this site other than Granules?
Krishna Prasad Chigurupati — Chairman & Managing Director
No, there is no other company tied-up with the site as of today. They only have contracts with supply within chemicals to countries across the world and even with our EBIT payment within India. But at this site, there is no other company tied up with them and we will also be an exclusive pharma company with them. There will be no other pharmaceutical company there.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Understood. And so this sales getting pushed because of the logistics issues? So any guideline you would like to view that how much of the sales have got deferred for the fourth quarter?
Krishna Prasad Chigurupati — Chairman & Managing Director
I think Priyanka is online to share. I think it is best she answers that. Priyanka, are you there?
Priyanka Chigurupati — Executive Director and GPI.
Yes. I am here but I couldn’t really hear Tushar’s question. Could you please repeat it?
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
I’m referring to these logistical issues which should have deferred certain sales in the U.S. market. So if you could just quantify how much of that could come up in Q4?
Priyanka Chigurupati — Executive Director and GPI.
How much of that will come into Q4?, did I hear you right?
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Yes.
Priyanka Chigurupati — Executive Director and GPI.
So right now, it is a couple million dollars of sales that we couldn’t hit in Q3 — at the end of Q3 because of the logistical issues. How much of that will come into Q4 is a question that — we need to figure it out because they’re still having some of those issues in January. We look — we are trying to resolve it in a few more weeks. So how much of that will come into Q4 is something that is subjective depending on the customers replacing the orders.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Understood. Understood. And outlook on paracetamols, are you seeing the demand still strong? And how long, maybe a couple of quarters? Or what we could gain now the incremental businesses is going with the normal paracetamol business?
Krishna Prasad Chigurupati — Chairman & Managing Director
Paracetamol is growing, Tushar. There’s a huge growth in paracetamol business at the expense of a few other molecules, and we see a double-digit growth for the next few years. But more than the growth of the market, as you have seen, our model is always to — I need to use this word, but we cannibalize on other businesses. We are effective, our service levels are great, all the biggest brands in the world trust us. They like to work with us on long-term contracts. And especially for us, there’s a lot of demand. And when I said that we are not taking into account existing capacity which we are also expanding, we are planning to set up new capacities of more than 50% of the overall requirement. And again, for this, many of — as long as we are green, there are endless companies in the world who want to tie up long-term contracts with us.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Sure sir, and just last.
Krishna Prasad Chigurupati — Chairman & Managing Director
Tushar, the carbon tax and other benefits which people get and the commitments are made, there is no option but for companies to go for products with the lowest carbon footprint.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Sure, sir, just lastly on the considering this green initiative and the existing capital expenses you could just refresh the capex requirements for 23, 24?
Krishna Prasad Chigurupati — Chairman & Managing Director
’23, ’24, we are all along planning will be around INR300 crores, Tushar, but that was taken into existence — or account the PDA, our formulation capacity increases and some initiatives that Dr. Rama Rao was mentioning about and dramatic reactions and some initiatives. But what we are doing right now is a big initiative. And we feel that in the next four to five years, we should be spending at least INR200 crores. Just on this — INR2,000 crores just on this green initiative. And when we do this green initiative, it’s not only paracetamol and metformin that will come out, but there will be a few other byproducts and few other chemicals that can also add revenue to us. So in addition to whatever we have planned, this will be INR2,000 crores extra in about four to five years.
Tushar Manudhane — Motilal Oswal Financial Services — Analyst
Got it. Thank you. That’s it from my side.
Operator
Thank you. The next question is from the line of Yogesh Tiwari from Arihant Capital Markets Limited. Please go ahead.
Yogesh Tiwari — Arihant Capital Markets Limited — Analyst
Thank you. My first question basically is regarding there has been some drop-in gross margins on a quarter-on-quarter basis. So is this related to higher sales of paracetamol?
Krishna Prasad Chigurupati — Chairman & Managing Director
Yes, Yogesh. You’re perfectly right. As you’re all aware, API themselves have a lesser margin than the finished dosages so Paracetamol API sales have increased and finished dosage sales in the U.S. have decreased. So that’s the reason for the drop-in margin for last quarter.
Yogesh Tiwari — Arihant Capital Markets Limited — Analyst
Yeah, thank you sir. And the second is like, on the interest and depreciation, also there has been an increase both on quarter-on-quarter and Y-o-Y so what would be the driver for that?
Krishna Prasad Chigurupati — Chairman & Managing Director
I think it’s best Mukesh answers that Yogesh. Mukesh go ahead.
Mukesh Surana — Chief Financial Officer
So the finance costs have gone up primarily there so far, the index rates have gone up. The working capital, we are continuously [Technical issue] on to now bring more free cash flow. So you would see that the debts are under control. It is just that so far, rates are going up and in the Q4 also we are expecting so far will have a little rise, so interest cost in Q4 also will be slightly higher side. On the depreciation, this — because of some capitalization we have done timely. There are depreciation which has come in quickly and this will be quite normal.
Krishna Prasad Chigurupati — Chairman & Managing Director
There will be increase in cost Yogesh, but like you know, we are expecting some new launches and the [indecipherable] is going to go full commercial with some of the new approvals coming through in the next one or two months, so increased revenues and increased product variated product mix can make up for some of these extra costs.
Yogesh Tiwari — Arihant Capital Markets Limited — Analyst
Sure sir, and sir, last question on Europe. So basically, yeah.
Operator
Sorry to interrupt. Mr. Tiwari, may we request that you return to the question queue? There are participants waiting for their turn.
Yogesh Tiwari — Arihant Capital Markets Limited — Analyst
Sure, madam. Thanks.
Operator
Thank you so much. We’ll move onto the next question that is from the line of Sajal Kapoor, an independent investor. Please go ahead.
Sajal Kapoor — Independent Investor — Analyst
Yeah, hi, thanks for the opportunity. To begin with by small appreciation for the management team at Granules, I’ve been tracking this business for over two decades now when our sales used to be in the INR20 crore, INR25 crore range. Management has clearly executed very well to grow sales by a factor of a double century in less than 24 years. So, congratulations for that. I’ve got two questions and both are long-term in nature. Coming to my first question. The DNA of Granules has been in large-volume compliance led manufacturing of molecules like Paracetamol. So economies of its scale has been our competitive advantage, right? So while these new recent announcements around biomanufacturing and clean science is clearly a bold new thinking in a new direction. It also means a new set of execution risks and challenges that we have never faced before. Right. So what could go wrong in this new approach? What are those potential pitfalls?
Krishna Prasad Chigurupati — Chairman & Managing Director
First of all, thank you very much, Mr. Kapoor. You have been with us and tracking us for so many years. My sincere thanks for that. I think you answered first part of your question, our DNA. Our DNA is different, like I always said we travel in the least trodden path. We don’t think like others. And one of the things we did was large-volume products with economies of scale and even large-volume products we never did it in the typical way that people manufacture. There was a differentiated way and then we went into tablets and into high volume tablets. So everything was different. So what differentiates us is our thinking and this applies to other products, large-volume or small volumes, and on this particular front of the new molecules and small molecules enzymatic reactions, I think it’s best that Dr. Rama Rao, who has been working on this for such a long time answers this.
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Yeah, thank you, Sajal. Just, the first question on the — on the way we are really looking at the new or the shift rather I call it. So first is the innovation mindset that needs to set into the people. So we have already have the leadership in place who have enough experience of looking at these kind of molecules with such technological options available and I think that will help us to really make sure that the pitfalls you have rightly pointed out, in terms of how do you look at the product development, how do we integrate the technologies together. And then actually weave out the final product which will be a combination of everything. So we looked at it. So the first thing on the people front, I think we have done enough homework and we have a new R&D center, which has got opened up about six-seven months ago. The team is in place to take care of these challenges. The second one we are looking at is, how do we really get to the world-class approach on to this? So we have certain tie-ups and we have certain partnerships with those people who have built their expertize in these particular areas. And with the collaboration between the internal Granules team and the external collaboration, we are pretty confident that the execution engine will actually run and this is our DNA, we really don’t think the way others think. I think that’s what Chairman alluded to giving examples of green chemistry, the green initiative, coupled with the kind of initiatives that we are bringing on the portfolio, the shift in the portfolio and the application of the science, technology and innovation into the portfolio through a human capital and also the infrastructure will enable us to lead in this, is my firm belief.
Sajal Kapoor — Independent Investor — Analyst
That’s very reassuring. And thank you Dr. Rao. And my second question is on the 4Q FY22 call, you were elaborating on the new oncology block and these services-based partnership model and going ahead, where you quote and I’m not quoting yourself, you said that once our technology strategies kick in, CRAMs will become an important business element in our journey. So, please, can you elaborate the medium term plans for CRAMs in terms of how many scientists can be integrated and what kind of additional or incremental infrastructure we would require to put a credible CRAMs strategy in place?
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
So. I think it is just to let you know that we made certain initiatives towards the technology and [technical issue]. I think we will not be able to offer a differentiated approach into the area of CRAMs in the pharmaceutical industry. So our first step towards the entire journey of considering ourselves as a science technology and innovation-led organization, we made three-four different moves. The first move, Chairman explained how do you go green, which is the most important requirement. The second by going green on the energy and also based on certain fundamental chemicals, how do you really build your platform of chemical intermediates for pharma which is both for the current product and also for looking at the future pipeline of the product. I think we need to establish this platform and then we should be able to really think about a much larger picture of how do we contribute towards the global platform of pharmaceutical industry on a CRAMs mode and otherwise. I think so the stage is set, but it is difficult to put a quick timeline to this, but our endeavor, first endeavor is to make sure that whatever we are thinking we will get to a degree of maturity.
Sajal Kapoor — Independent Investor — Analyst
That’s very thoughtful Dr. Rao. Thank you very much for all those responses and all the very best.
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Thank you.
Operator
Thank you. The next question is from the line of Varun Basrur from Julius Baer Wealth Advisors Private Limited. Please go ahead.
Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst
Yeah, hi, good evening for the management. Thanks for taking my question. First is, post the INR1,000 crore capex, which was announced in FY ’22 for over three years, I think the exit cap — the exit gross block would be somewhere around INR3,100 crores. I understand some of this capex is towards backward integration. Just want to understand what sort of revenue potential is INR3,100 crores of cross-block can achieve at current prices? And over what period of time the management wants to scale up their revenue to this?
Krishna Prasad Chigurupati — Chairman & Managing Director
While Mukesh answers this question, Varun just let me explain. This is also backward and forward integration. So revenue will not be the main key here because it’s all into company’s advice. So revenue will be eliminated at every stage. However, the profitability will improve and all future investments whatever we are doing, we are looking at least two and half times to three times of asset terms with this particular module and I would like Mukesh to add to this.
Mukesh Surana — Chief Financial Officer
Yeah, so some of the gross block which we have or some capex initiatives which we have taken-up and also some initiatives which we are planning to take in next couple of years, it’s a long-term project. So some of the differentiation and maturity, which Dr. KVS also was talking about, all are — will get into payback mode starting from next few years. So currently, the gross block looks high but the revenue generation is going to start.
Krishna Prasad Chigurupati — Chairman & Managing Director
Just like to add here Varun, the gross block like I said is going to go from a fully commercial shortly with the new approvals coming through and that is going to make a large difference to our returns on capex on a gross block.
Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst
Sir thanks for that. The second question is, just building on what the previous participant had asked. If you can split the finance cost into what the debt service cost is?, and there’s a factoring element also there what is that factoring of receivables? And what is the cost of funds today at the end of this quarter? Yes, thank you.
Krishna Prasad Chigurupati — Chairman & Managing Director
Yeah, so the finance cost we see it holistically, the factoring costs also indirectly it’s a financing of cost only. There is a significant cost for factoring also but the difference between the factoring cost versus borrowing cost not significantly different and the factoring definitely helps us to bring the free cash flow timely. And so the overall finance cost is primarily because of [indecipherable] which has been ramping-up quarter-on-quarter. So every time when Fed rate increases, RBI rate increases [indecipherable] the impact. So that is what is impacting.
Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst
What is the cost of funds, if you can just, what was the average cost of funds this quarter?
Krishna Prasad Chigurupati — Chairman & Managing Director
Average cost of fund this quarter is closer to 5%.
Varun Basrur — Julius Baer Wealth Advisors Private Limited — Analyst
All right. Okay, thank you.
Operator
Thank you. The next question is from the line of Pujan Shah from Congruence Advisors. Please go ahead.
Pujan Shah — Congruence Advisers — Analyst
Hi, sir. First of all I just wanted to ask a question on the raw material easing, the price erosion in U.S. So could you just get a sense of how how much price erosion has done in quarter on a blended side end and on a year-on-year basis, how like, from the top, how much it had been eroded?
Krishna Prasad Chigurupati — Chairman & Managing Director
I think first, Priyanka answers what is the erosion that could be happening in the U.S. maybe if required I’ll answer our mitigation measures. But I will let Priyanka go ahead and answer that.
Priyanka Chigurupati — Executive Director and GPI.
Sir, if I understood your question correctly, you’re asking about the erosion expected for the next year, am I right?
Pujan Shah — Congruence Advisers — Analyst
Yeah, so I am just, first of all I’m expecting the erosion for this specific quarter and the price erosion from the top, the high which made, it has made and that from that, how much a percentage [Technical issue]
Priyanka Chigurupati — Executive Director and GPI.
Could you please put the phone little bit away from you. You’re very muffled.
Pujan Shah — Congruence Advisers — Analyst
Am I clear?
Priyanka Chigurupati — Executive Director and GPI.
Yes.
Pujan Shah — Congruence Advisers — Analyst
Yeah, so first of all I just wanted to ask that for this specific quarter, how much percentage price being eroded? And the second question would be like the continuous question would be the how much the prices be eroded from the high it has made in the year-on-year basis? So, like let’s say, it has made a high. So currently, the price of INR60 — so the erosion price is INR40, so what is the actual from the high it has been eroded in percentage terms?
Priyanka Chigurupati — Executive Director and GPI.
See, it’s very different I mean, different sets of products, different categories of products have a different[Multiple Speakers]
Pujan Shah — Congruence Advisers — Analyst
Yeah, I wanted to talk on a blended basis, so you can get a sensible on a range basis. It’s okay for us.
Priyanka Chigurupati — Executive Director and GPI.
On a blended basis, I can’t — we can’t define it by quarter. But YTD we expect, we had a total erosion of roughly around 12% to 15%.
Pujan Shah — Congruence Advisers — Analyst
12% to 15%? Hello?
Priyanka Chigurupati — Executive Director and GPI.
Yes, 12% to 15%.
Pujan Shah — Congruence Advisers — Analyst
Okay. And are we seeing this price bought like erosion is bottoming out due to destocking, it has been like lesser than the previous quarter and now it’s becoming U.S. becoming stable and predictable in all means or it seems still concerning — it’s still U.S. being a concerning stage for us?
Priyanka Chigurupati — Executive Director and GPI.
The US market has been concerning and will continue to be a little bit concerning for the next couple of quarters. But that said, prices have bottomed out to a large level to a point that customers who have quoted very without thinking big-picture have gotten out of products. So now most of our customers, especially on the controlled and large-volume products which are essentially our bread and butter are really looking backwards to understand every integration strategy and/or any other strategy that you might have and are paying more attention to the supply chain versus erosion. So while there will be erosion year on year, the rate at which the market erodes will certainly get better, and I think this upcoming year will not be bad for [Technical issues] the U.S. markets.
Pujan Shah — Congruence Advisers — Analyst
Okay and one last question from my side is, from Greenko which we have made a tie-up. So, how many percentage of raw materials is being supplied by the Greenko?
Krishna Prasad Chigurupati — Chairman & Managing Director
As basic chemicals like I said, ammonia and hydrogen, nitric acid and one or two other chemicals will be supplied by them and we will use these chemicals to further transform them into other chemicals which will be used by our products and possibly will have some surplus material to sell outside too. So as of now, I see about four-five chemicals which they will be supplying in addition to carbon-free energy.
Pujan Shah — Congruence Advisers — Analyst
And let’s say in four-five years how many chemicals could they supply to us or something like any blueprint plan we have made, something like that?
Krishna Prasad Chigurupati — Chairman & Managing Director
We have not made any blueprint plan. We are working together in the true spirit of partnership, it’s a constant innovation that’s going on. So we will — as we go by we’ll get to have new ideas and new ways of working.
Pujan Shah — Congruence Advisers — Analyst
Okay, okay, sir, thank you so much.
Operator
Thank you. [Operator Instructions] The next question is from the line of Darshil Jhaveri from Crown Capital, please go ahead.
Darshil Jhaveri — Crown Capital — Analyst
Yeah, hi, am I audible?
Krishna Prasad Chigurupati — Chairman & Managing Director
Yes, you are Mr. Jhaveri.
Darshil Jhaveri — Crown Capital — Analyst
Hi. Good evening, sir and thank you so much for taking my call. I just want to congratulate on great set of results and your new green initiative. That sounds very promising. So I would just like to ask about better performance currently in the December quarter, would that be taken as a base for our future performance may be next year or something? For FY24 could we have some target of our revenue and margins that could help me out a lot?
Krishna Prasad Chigurupati — Chairman & Managing Director
Mr. Jhaveri basically let me now talk on quarter-to-quarter, but the year-on-year definitely is going to be an improvement. And like I said the — in last few calls that will be creeping up of EBITDA margins and revenues and we see that path very clearly, but year to — year-on-year, definitely there is going to be a good growth and especially with all the new initiatives we are taking. Well, we can’t put a number on it today. I think it will be an exciting journey going forward.
Darshil Jhaveri — Crown Capital — Analyst
Okay, so the — so what could be our all the backward integration and so at peak utilization, could you help out with some numbers that would be very helpful? Like, maybe INR5,000 crores at 20% or 22% margin something or the other not a specific number with some range would help out a lot.
Krishna Prasad Chigurupati — Chairman & Managing Director
It’s too early to talk about business Mr. Jhaveri. But one thing, like I mentioned a little while ago, some of our new investments, we are looking at, at least 2.5 to 3x return. So we still need to validate this, but they look very promising. And the biggest part here, Mr. Jhaveri I don’t know if you heard in my speech, if not today, in a few years, the carbon border tax will be implemented. And people who are buying products from other countries for all the Scope 3 emissions, they’re importing — they’re bringing into their country, they have to pay tax or they have to incentivize people like us to make sure that there is no carbon footprint. So definitely, the margins could be a lot different than what we are expecting today. The world is going through a great change. And I think there’s a great sense of urgency and the way we work year-on-year is going to change.
Darshil Jhaveri — Crown Capital — Analyst
Okay, thank you so much for your answers. That helps me a lot. Thank you so much sir. All the best.
Krishna Prasad Chigurupati — Chairman & Managing Director
Thank you.
Operator
Thank you. The next question is from the line of Tushar Bohra from MK Ventures. Please go ahead.
Tushar Bohra — MK Ventures — Analyst
Yeah, thanks for the opportunity. Couple of questions, first on the operations side, rather first, I’ll ask on the capex side. Sir, just want to understand how much of the current gross block[phonetic] is not optimally utilized or will get optimally utilized say over next few quarters? Especially you want to look at some color on MUPS based facility as well as on the Onco logs. Since you’re planning such a large new capex, it would be good to understand the status of the existing large capex already executed?
Krishna Prasad Chigurupati — Chairman & Managing Director
Let me answer this about the current gross block before Mukesh gets in. The MUPS block, which was under-utilized maybe we spend about INR280 crores to INR290 crores on that. And definitely we are going to see at least 2.5 times as we turn-on that very shortly. And this possibly the very decent margins too. So that’s what the MUPS block. The Onco block, there are so many things happening there. And that’s one of the things that will take a little more time to start yielding but some of our expansions which we’re doing using as the market reactions and all are going to be made in the Vizag site, though not on the Onco block, on the other blocks which we have commercialized. So that also should turn around soon. And the only asset that may not be paying optimum today could only be the Vizag site, all other sites are being optimally utilized and going forward we are very-very confident about our capex and also to let you know, we are not going to take huge step to put up the capex. We are very confident of our cash generation and cash flows and I don’t see it as a great risk Tushar.
Tushar Bohra — MK Ventures — Analyst
Sir it would be fair to assume that the new capex obviously would be put up in phases and we would continue monitor the progress of say given phase before we commit to greater capex and what would be the kind of payback period, intended payback period. I know it’s too early, but you would have a target in mind for all new capex as to the payback period. Right?
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Yeah, Tushar. Currently, as the Chairman has clearly explained we don’t see any issues in terms of the sufficient cash generation from operations, which will take care of the loan for the new capex and capex, we generally have payback period anywhere from three to six to seven years. So depending on some of small capex and small debottlenecking can give payback period quicker, some of the large initiatives can be six years kind of payback also.
Tushar Bohra — MK Ventures — Analyst
Okay sure. My second question is on the operation side. Just an observation from the numbers. This quarter our other molecule contribution is about 13%, 13.5%. And it was about close to 19% last-time around. Quick back-of-the-envelope calculation shows me about INR40 crore, INR50 crore drop-in revenue in the other molecules. Second, U.S. business contribution overall has increased sharply from 43% to 49% and this is despite the lost sales in U.S. And third observation is that my standalone gross margin is over 300 bps up quarter-on-quarter whereas the consolidated margin is down by close to 100 bps. So, just help us understand what’s leading to this kind of readings on the numbers front?
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
Yeah sure Tushar. Some of the breakup we have already shared it in the Investor Presentation. So and also it is difficult to tell you what happened in standalone to concern because in the standalone many times Q3 when we have the performance there are inventory which is dispatched to USA for Q4 dispatches there. And particularly coming to quarter three, you are right, there is a mix change and there is a lower sale in FD and PFI and that FD lower sale is primarily also because of the 3PL smoothening issue which has been taking some time, it is of course the betterment the capability of our new 3PL is good in terms of automation, digitization, just that stabilization is taking time and we are expecting in Q4, it would improve, So Q4 we are seeing the mix should be changing and but overall still the value addition percentage also we will be doing.
Krishna Prasad Chigurupati — Chairman & Managing Director
And Tushar, let me just add, there was an increase in Paracetamol sale to the U.S. which the margins are not similar to FDs but now going-forward again, some of the Paracetamol sales are going to get converted to FDs for the U.S. market itself, that itself is going to correct and through the 3PL dispatches that’re going to improve, there will be better margins on the regular FDs also.
Tushar Bohra — MK Ventures — Analyst
Sir just a qualitative follow up on this please. Just to understand, we have in the past guided that, are other molecules would start to contribute meaningfully. And I understand it’s a gradual process for few years. But by when do we really start to see meaningful traction in the non-para metformin [indecipherable]
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
So, Tushar, as you as you’ve likely seen there, the first drop-in the other molecules is not on account of not new products. But the products where we are making the low through puts or low value additions. That is the products where we have taken a conscious call not to promote the products in the markets where there is no profitability or less [Technical issue] The second part, where we have shifted our portfolio, I’ve already told in my opening statement that in the short-to-medium term, we should be able to start seeing both the PPI and the finished product commercialization into markets in U.S. and other geographies. So that shift is going to really take place probably from two years from now, you start seeing a shift where you will start getting into products which are of different nature as compared to the standard type products, which we normally have as a part of a commercial basket which occupy a percentage. However, for the shift to go into the direction in a much stronger way, I think our focus will be that four to five years down the line, we will have a dominant segment of new product portfolio coming to launches in various regulated market geographies.
Krishna Prasad Chigurupati — Chairman & Managing Director
And to add to that Tushar, if you have seen, we have been getting some approvals lately. Today also we got an approval for uncontrolled substances. And one that’s already approved will be commencing shortly. And next two months we are expecting some more approvals. All these things also will definitely add to our increase in new products market-share. So let’s see how things go, but what Dr. Rama Rao is mentioning in some of those real, real attractive products at the differentiated chemistries and all. That should take about two years.
Tushar Bohra — MK Ventures — Analyst
Sure sir, thank you and wish you all the best. I’ll jump back in the queue.
Operator
Thank you. The next question is from the line of Anirudh Gangahar from Avendus Wealth Management. Please go ahead.
Anirudh Gangahar — Avendus Wealth Management — Analyst
Yeah, thank you for the opportunity. I got two questions, first is just on the U.S. sales that we have not materialized during the last quarter. If we had, what would be the delta in the revenue and probably even at the EBITDA level had it in, I mean, where it materializes in this quarter or next quarter is something which should come through hopefully? And the second thing is, second query is on the press release that has been given. There is a comment that we are also seeing a price and margin erosion in Q3 and expect a similar trend in Q4. Are we referring to the US market only or are we referring to the overall consolidated picture that we are going to see some more margin erosion in the current quarter as well? Those are my two questions.
Krishna Prasad Chigurupati — Chairman & Managing Director
I will do the second question first. And — we were only different to the U.S. market, and Priyanka has said, we are already almost bottoming out. Erosion will subside. And also my personal view is that people were competing to get market share all along because there were no new approvals coming from people because FDA was not inspecting many customers, many of our companies here. Now the FDA started inspections, more approvals are coming through. And I don’t think people will be fighting for the same market and prices may — if not go up, definitely may stop eroding, but we will see as we go by so — and the other thing was [multiple speakers] Priyanka?
Priyanka Chigurupati — Executive Director and GPI.
Sorry, I would just say that in addition to that our view on erosion is pretty optimistic because like CMD said outside of the approval coming in if you looked at the FDA, the trajectory over the last couple of weeks and months, actually weeks for many of the big pharma companies who are essentially our competitors, you will see a weakness. We just had RFP audit and we don’t have that weakness right now. So there are many opportunities that are coming up which we are taking whilst making a lot of onus on the longevity of it. So considering that I do think that customers are looking very closely at the supply chain versus just pricing in the market, so I do see next year being much better in terms of erosion than we had this past year.
Krishna Prasad Chigurupati — Chairman & Managing Director
And I think Mukesh can take the first question.
Mukesh Surana — Chief Financial Officer
Yeah, so the USA sales what probably might, we might have lost. Priyanka also had clarified earlier to one of the questions is couple of million dollar is what we would have lost and adding to that there is, this sale is on FD. So that also has impacted the VA[phonetic] percentage and EBITDA percentage.
Anirudh Gangahar — Avendus Wealth Management — Analyst
Okay, so that loss of sales would largely be directly flowing to the EBITDA number?
Mukesh Surana — Chief Financial Officer
Yeah, the substantial margin on that is, because FD has the highest-value addition percentage so directly to EBITDA.
Kandiraju Venkata Sita Rao — Joint Managing Director and Chief Executive Officer
And also there was also a failure to present our penalties which we had to pay. That also has contributed. Once the supplies have streamlined the margins are definitely are going to improve. We cannot put a number right now but definitely there’s going to be a positivity.
Anirudh Gangahar — Avendus Wealth Management — Analyst
I understand that part. Thank you very much for the answers, sir.
Operator
Thank you. The next question is from the line of Harith Ahmed from Avandus Spark. Please go ahead.
Harith Ahmed — Avandus Spark — Analyst
Good evening. Thanks for the opportunity. There is a land acquisition in Vizag which you talked about, spend of around INR43 crores. This is for which business of ours?
Krishna Prasad Chigurupati — Chairman & Managing Director
Yeah. We have acquired the land to look at the continuous flow of intermediates and some of the APIs that we want to put it as a part of our strategic journey. So we were looking at the site which will have the advantages of looking at it. So the Vizag site is going to focus on this technology-based platforms on flow and engineering excellence.
Harith Ahmed — Avandus Spark — Analyst
Okay. And on the operating cash flows business, roughly INR50 crore reduction versus last quarter and this is despite the cash conversion cycle improving, so any reason that you can call out here?
Krishna Prasad Chigurupati — Chairman & Managing Director
Yeah. Current year operating cash flow has been healthy, INR161 crores and the primary reason why the free cash flow is negative is because of the capex, but the operating cash flow has been slightly lower than sequential quarter, it is on account of some delayed sales and that has resulted in little higher side on the debtors.
Harith Ahmed — Avandus Spark — Analyst
Okay. Lastly, on the Paracetamol demand, you commented that it’s been strong. So trying to understand and when I look at the numbers also the last couple of quarters, we’ve seen a step-up in [Technical issues] So any particular factors that is driving this demand, any disruptions or competitors that’s turning out to be positive for us or is it just a more customer or contract maybe from our side?
Krishna Prasad Chigurupati — Chairman & Managing Director
Harith, one of the smaller reasons is growth in usage of Paracetamol but the main reason is supply security. We supply to lot of the biggest brands in the world. And the current suppliers, they don’t feel very comfortable with and they want to make a big change to us and that’s one of the reasons we see that there is a good potential as we go by.
Harith Ahmed — Avandus Spark — Analyst
Okay and last one with your permission. Just on the R&D spend. We’ve been guiding for a step-up there to around INR40 crore to INR45 crores a quarter if we tracking roughly half of that so by when should we factor this setup?
Krishna Prasad Chigurupati — Chairman & Managing Director
Actually some of the filings got delayed Harith and that’s the reason the cost has come down and also there has been some efficiencies built into the R&D organization. But the main reason is the delay in filings. So the filing fees and the developments and the bio studies, some of them got delayed, so next quarter, we should come back to normalcy, and after that a little more shift in our R&D strategy towards high-technology products, I think there could be a little extra increase on R&D spend.
Harith Ahmed — Avandus Spark — Analyst
Okay, got it, thank you very much sir.
Krishna Prasad Chigurupati — Chairman & Managing Director
Thank you.
Operator
Thank you. Ladies and gentlemen due to time constraints that was the last question. I now hand the conference over to Dr. Krishna Prasad for his closing comments.
Krishna Prasad Chigurupati — Chairman & Managing Director
Once again ladies and gentlemen, thank you very much for spending the evening with us today. And while I personally, I’m very excited with the new journey and also very proud about what we’re doing. In fact, I feel that we could be the first Pharmaceutical company in the world to make a pharmaceutical API. I was so happy to share all this with you and once again thank you very much for spending your time with us today. And then in case of any further questions on green initiatives, please feel free to write to us. Thank you.
Operator
[Operator Closing Remarks]