Granules India Research Reports By Edelweiss, Motilal Oswal, HDFC Sec + Investors Presentation

Edelweiss Research Report

Strong quarter aided with improved product mix

Granules India Limited (GIL) reported revenues of INR 386 cr, showing an annual growth of 10%. The strong uptick in numbers has been primarily on account of higher formulations (FD) sales (especially Ibuprofen) by the company. Geographically, regulated markets of North America and Europe continued to contribute nearly two-third to the overall topline with Europe growing at a stronger 21% y-o-y. Improving product mix due to higher formulations sales led to improvement in gross margins by 332 bps to 53%. The management continues to guide for higher FD sales while leveraging upon backward integration into APIs for margins improvement. In view of this strategy, the company is undergoing expansion in its key APIs which are expected to generate incremental inflows from H2FY18. Further, GIL continues to benefit from contract manufacturing and direct formulation sales in regulated markets through multiple joint-ventures (JV) and acquisitions. Although, profits from its Omni-chem JV has been muted this quarter, GIL is certain to compensate for it in the subsequent quarter leaving the annual targets unchanged. In a nutshell, we believe the management’s clear vision of growth coupled with operational efficiency, supported by growing order inflows and strong brand reputation of the company, will contribute substantially to GIL’s future growth strategy.

Augmented formulations sales to usher overall expansion

Formulation revenues have grown by 22% to contribute 39% to Q1FY18 revenues from 36% earlier. This is largely attributable to higher Ibuprofen sales which nearly doubled y-o-y to INR 73 cr in the current quarter. Going forward, we estimate similar increase in formulations sales and corresponding uptick in gross margins with major contribution from Ibuprofen and Metformin. With new expanded capacity in Metformin becoming operational from FY18, we estimate steep growth in its sales as well.

JVs business miss in Q1; to compensate in subsequent quarters

GIL gets profit share from two of its joint-ventures i.e. Biocause and Omni-chem. Revenues and profit share from Biocause JV has been higher than estimates due soaring Ibuprofen demand globally. The company received INR 5.5 cr from Biocause JV as against INR 3 cr y-o-y. However, from the Omni-chem JV of contract manufacturing, it incurred a loss share of INR (2.6) cr as dispatches scheduled for the quarter shifted to subsequent quarter resulting in postponement of revenue accounting. Resultantly, we estimate contributions from Omni-chem JV for the entire fiscal to remain in line with our estimates of INR 16 cr.

Valuation:

In our view, Granules India is at the cusp of a new growth story backed by the above stated factors. Ergo, we expect strong cash flows, improving margins and steady growth across its business segments. Our earnings estimates per share for FY18E and FY19E are INR 7.9 and INR 11.6 respectively. We value the company’s base business at 17x FY19E earnings of INR 11.6/share, whilst the value from in-licensed opportunities and new filings at INR 30/share. We maintain our ‘BUY’ recommendation on the stock, with a target price of INR 228/share.

Motilal Oswal Research Report

Combination of strong growth and multiple re-rating

From being one of the largest Paracetamol API manufacturers for regulated markets, Granules India (GRAN) has now ventured into CRAMS and US Rx business, where it can leverage its competitive advantage of being a high-quality, low-cost producer. Despite delivering ~40% PAT CAGR over last five years, we expect GRAN to deliver ~35% PAT CAGR till FY20E. This will be led by (1) capacity expansion in the base business, 2) doubling of revenues (INR2.3b in FY20E from INR1.0b in FY17) and expansion in EBITDA margin (>30% in FY20E from ~21% in FY17) in Omnichem CRAMS JV, and 3) new US generic business sales of ~USD85m in FY20 v/s nil currently.

HDFC Sec Research Report

Encouraging quarter

After several quarters of muted top-line growth, GRAN reported 10.2% growth in 1QFY18. Top-line came in at Rs 3.78bn, 5% ahead of estimates. The EBITDA margin at 20.3% was up 40bps YoY, in-line with expectations. While the gross margin expanded ~330bps YoY owing to the improving business mix, higher operating expenses prevented further expansion in the EBITDA margin. PAT was Rs 368mn, down ~5%YoY, largely owing to lower other income (Rs 4mn vs Rs 30mn YoY) and a higher tax rate.

We continue to believe that strong top-line growth will kick in starting 2HFY18. Mgt expects ~15-20% top-line growth, and ~25% profit growth in FY18, on the back of expected ANDA approvals for the US market, core business capacity expansion kicking in and a continued ramp-up in the Omnichem JV. However, the full impact of these factors is likely to be visible only from FY19. Overall, we expect GRAN to report ~17% revenue CAGR, ~21% EBITDA CAGR and ~24% PAT CAGR over FY17-20E.

Maintain BUY with a revised TP of Rs 185 (16x June19E EPS).

– Formulations: The finished dosages segment grew ~19%YoY to Rs 1.5bn in 1QFY18. GRAN is on track to begin its scale-up of the US formulations segment starting 2HFY18, with 3-4 products expected to be launched. Two TAD dates in 4QFY18 have provided further visibility on this front. It also expects to launch 4 products from its USpharma tie-up, where we expect GRAN to generate at least US$ 20mn in FY19E. From this basket, Prasugrel is expected to be the first, with a launch in Oct-17 likely. GRAN is also planning to file 20-22 ANDAs over the next two years, which would take its total ANDA filings by FY19 to ~35. Foresee ~26% rev. CAGR in the formulations business over FY17-20E.

– API and PFIs: Growth in the API and PFI segments was less impressive at 2% and 10% YoY respectively. Going ahead, we expect a pick-up in PFI sales, owing to increased capacities. API sales are likely to be muted, owing to the increased need for captive consumption. Overall, we expect both segments to grow at ~8% and 11% CAGR respectively, over FY17-20E.

– Margins to scale up: With the ramp-up in formulations and Omnichem JV sales, margins are likely to expand. However, increased R&D spending leads us to forecast only a ~225bps expansion over FY17-20E.

Investors’ presentation reveals initiatives for future growth