Making strides towards better business model…
About the stock: Granules is a large-scale vertically integrated company that manufactures API, intermediates and finished dosages. It owns eight manufacturing facilities catering mainly for export markets (~94% of sales).
• ANDA and Dossiers filed and approved- US- 62, Europe- 8, Canada- 6, UK- 2, Others – 3.
• Top five products (Paracetamol, Ibuprofen, Metformin, Methocarbamol, Guaifenesin) contributed 72% to Q3FY24 revenues (across segments).
• Revenue mix Q3FY24: Formulations (FD) – 66%, API – 19%, PFI – 15%.
Investment Rationale
• Mixed Q3FY24 numbers with flat revenues but improved margins– Revenues were flat YoY to ₹ 1156 crore, as ~21% growth in the US was undone by de-growth across other markets. On segmental front, Formulations grew 47% % YoY to ₹ 766 crore, driven by increased volumes in the US across all major products especially controlled substances. APIs + PFIs on the other hand declined ~37% to ₹ 390 crore led primarily by reduction in Paracetamol prices which were reduced in-line with the reduction in the key raw material prices besides correction in inventories in LATAM markets. Gross Profit grew 19% YoY to ₹ 658 crore (margins stood at 57%) driven by better product mix (higher Formulations). EBITDA grew 8% YoY to ₹ 251 crore and EBITDA margins stood at 21.7%.
• Backward integration plans with green technology focus –Granules is strengthening key APIs through backward integration into KSMs via green energy root. Granules CZRO’s primary goal is to strengthen the key molecules i.e., Metformin and Paracetamol through backward integration into DCDA and PAP respectively. It has also made significant progress in biocatalysis with two products already through pilot process.
• Plans to expand product and therapeutic basket- The company is focusing more on Formulations (FD) to drive growth backed by volumes especially in the US and Europe. The focus especially in the US is shifting from Para 2 to Para 3 / Para 4 launches with better unit economics. It plans to file 7- 8 products in the US every year. The company is also focusing on Oncology as a segment with dedicated API and formulations block at Vizag.
Rating and Target price
• We recommend BUY on the back of 1) focus on strengthening the margin accretive FD portfolio, 2) firm backward integration plans, 3) compelling risk-reward matrix with an ability to play in strength areas
• We value Granules India at 17x FY256E EPS of ₹ 30.2 with a target of ₹ 515/share.
Click here to download IDirect Granules India Update March 24
Leave a Reply