Motilal Oswal Target 185
Results Overview- Above est. quarter; EBITDA margin expansion by 180bp leads to PAT growth of 40% Revenues at INR 366cr, +19% YoY were 2% above our estimate of INR 360cr. The expanded PFI capacity of 4,000 tons commenced operations during the quarter in addition to the existing capacity of 14,400 tons. This contributed to incremental growth from PFIs which was affecting revenue growth since the last four quarters. We believe revenue growth should accelerate moving into 2HFY16.EBITDA at INR 68.9cr, +32% YoY was 13% above our estimate of INR 60.8cr. EBITDA margin at 18.8% was higher by 180bp YoY and 90bp QoQ against our estimate of 16.9%, a beat of 190bp. Management is targeting EBITDA margins of 20% over the next couple of years. PAT at INR 31.0cr (+40% YoY) is 16% ahead of our estimate of INR 26.7cr
Valuation and view
Granules is a high quality play on the mid-cap pharma space. The company is climbing higher in the pharma value chain by focusing on formulations which is expected to reach 65% of standalone revenues from 32% in FY15. While we expect the base business to solely drive profits until FY18E, we expect Auctus and the Omnichem JV to start contributing meaningfully to profitability by FY19E.
Based on the strong margins displayed by the company in 1HFY16, we raise our margin assumptions for FY16/17 by 1.5%/1.6% to 18.1%/19.3% and accordingly raise our EPS estimates by 15% for FY16/17. Overall, we expect the company to grow its Revenues/EBITDA/PAT at 17%/27%/34% respectively over FY15-18E and improve pre-tax ROCE from 19% in FY15 to 28% in FY18E.
We value the business at 20x Sep 2017E EPS which is a 10% discount (being a B2B player) to the mean multiple commanded by midcap formulation companies and maintain BUY rating on the stock with a target price of INR 185 / share (earlier INR 160).
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