“100 Bagger” Pharma Stock Is At A “Game Changer” & “Strategic Inflection Point”: Motilal Oswal

Motilal Oswal and its team of ace stock researchers deserve a certificate of appreciation for their yeoman service to novice investors like you and me. We have been handed over multibagger stocks on a platter without having to even lift a finger!

When Granules India was cited as a potential 100-bagger in the 19th Wealth Creation Study, I instinctively knew that mega bucks were in store for us.

I was right because on the day the report was issued (10.12.2014), Granules India was quoting at Rs. 75 (adjusted for split). Today, 16 months later, the stock is at Rs. 127, which means that gains of 70% are on the table. These are handsome gains by any standard.

To explain the nuances of Granules India, Jehan Bhadha of Motilal Oswal had issued an initiating coverage report on 27th August 2015 in which a target price of Rs. 160 (40% upside from the then price of Rs. 115) was foreseen.

To everyone’s delight, Granules India effortlessly touched an all-time high of Rs. 165 on 30.11.2015, fulfilling Jehan Bhadha’s prophecy and delivering gains in excess of 100% from the time of the Wealth Creation Report.

Now, the interesting part is that Motilal Oswal appears to have lost sight of Jehan Bhadha’s ‘initiating coverage’ report because Amey Chalke and Kumar Saurabh have issued a second ‘initiating coverage’ report.

Be that as it may, the latest research report makes for very interesting reading because it formulates the theory that Granules India’s independent entry into the OTC market is a “game changer”. It also claims that the US OTC and Rx business will “transform business model” and lead to a “35%+ revenue CAGR in GRAN’s formulations business over FY16-20E”. It also states that the valuations are attractive and that the stock is likely to witness a “re-rating”. As expected, there is a detailed explanation given in support of all the claims.

The best part is that we do not even have to read the printed material because Amey Chalke has verbally explained the core points in an easy-to-understand format.

Amey and Kumar have foreseen a target price of Rs. 160 for the stock (32% upside), which appears quite modest in the context in which the recommendation is made. We must also remember that Granules has already crossed that price target in the past and so crossing it again may not be a big hurdle if the fundamentals are supportive.

It is worth noting that the same optimism about Granules India is shared by Vikas Sethi who has projected a target price of Rs. 175. His logic is also clear and succinct:

“Granules India again is a fundamentally solid, very good company. It is a strong pharma company with presence across the entire manufacturing value chain from APIs to formulations to finished dosages. This company is a preferred integrated supplier for global MNC pharma companies. This company has had an impressive track record and if you look at its balance sheet, it is pretty healthy. The margins are pretty high, it enjoys pretty good return ratios. The company in my opinion would continue to grow at a CAGR of around 25 per cent for its revenues and 30 per cent on its net profit for the next three to four years. So like this stock at the current levels after the correction which it has seen from its highs and my target would be Rs 175 in a year.”

Nalinakanthi V of BusinessLine has also conducted a detailed analysis of the strengths and weaknesses of Granules India. At the end, she concludes that Granules has “significant headroom for growth over the next two to three years”. While Nalinakanthi has not projected a target price, she has advised a buy on the basis that the present valuations of the stock of about 14 times its estimated 2016-17 earnings, are at “a nearly 50 per cent discount to the BSE Healthcare Index”.

In the light of the unanimous opinion of the experts, we have to decide for ourselves whether we want to give Granules India pride of place in our portfolio or not!