I pointed out earlier that the Motilal Oswal 19th Wealth Creation Study shortlists seven stocks as potential 100-baggers. Four of these stocks are Pharma stocks. We discussed two of these, Suven Life Sciences and Shilpa Medicare, earlier. Let us now look at the third one, Granules India.
Few people have heard of Granules India. However, it has fabulous multi-bagger credentials. Over the past one year, the stock has given a return of 285%. The return over two years is 334%.
This fabulous performance has come on the back of a strong operating performance, which looks likely to continue in the future as well.
The best way to come to grips with Granules India is to read the comprehensive ‘initiating coverage’ report issued by several brokerages.
KR Choksey states that Granules is “Moving up the value chain” on the basis that it has presence across the entire manufacturing value chain from active pharmaceutical ingredients (API) to pharmaceutical formulation intermediates (PFI) to finished dosages (FD) manufacturing. It is a strong integrated supplier for the global customer, the report says.
KR Choksey also emphasizes that Granules has shown impressive revenue CAGR of 26% & PAT CAGR of 63% over FY09-14. This is expected to be maintained given that the Company has (i) entered into the high margin CRAMS business through JV with Ajinomoto Omnichem and (ii) recently acquired an API manufacturer (Actus Pharma) with U.S. FDA approved facility.
KR Choksey recommends a buy on the basis that:
“Granules India has achieved 28% CAGR in revenues & 39% CAGR in earnings over past 10 years. We expect the company to continue its growth momentum on account of moving up the value chain towards high margin business, improved capacity utilisation & capitalising Auctus Pharma’s portfolio. We expect revenue & earnings CAGR of around 21% & 33% respectively over FY14-17E. With strong revenue growth & increase in margins we expect ROAE to improve from 23.9% in FY14 to 27.6% in FY17E & ROACE to improve from 18.9% to 26.5%. At CMP 747 the stock is trading at 11.0x of FY16E & 8.5x of FY17E EPS. We initiate coverage on the stock & recommend ‘BUY’ rating with the target price of Rs1010 based at 13x one year forward earnings of Rs77.7)”.
Emkay is also gung-ho about Granules India. In their initiating coverage report of July 2014, Emkay advised a buy on the basis that the stock price (then at Rs. 566) was “inexpensive and compelling” and that the valuation was not pricing in improvement in business quality and growth. It was also stated that the improving return ratios, cash flows and profitability would re-rate the stock.
Emkay has retained its bullish stance after the Q2FY15 results. It has recommended an “accumulate” on the basis that “the improvement in business mix, increased capacity utilization and higher margin trajectory would continue”. The update foresees a target price of Rs. 881 for the stock.
Yet another believer in the Granules story is Anand Rathi. In their “initiating coverage” report of October 2014 and the Q2FY15 update report on November 2014, Anand Rathi has recommended a buy on the basis that the company has “robust revenues and improving margins“. It is also stated that the increasing emphasis on finished dosage would help maintain good growth momentum, going forward and that the significant turnaround in business model towards a higher-value chain would improve profitability. It is also stated that the stock is trading at attractive valuations of 16.2x FY15e and 12.6x FY16e earnings.
Anand Rathi’s Devang Mehta came on TV a few days ago to state that Granules India has been showing an excellent trajectory in the last 2-3 quarters and that the company has gradually materialised from API to PFI to formulations business and all of these are low margins, medium margin and high margin business respectively. He explained that the Company has high return ratios and that if it is valued at say 14-15 times one year forward earnings, one would have a price target of around Rs 1000 for the stock.
Centrum has also initiated coverage on Granules India on the basis that it has a “unique business model” with its presence over the entire pharma value chain and derives over 80% of its revenues from exports. It is also pointed that the company is the world’s largest producer of PFIs and hence is a preferred supplier to MNC pharma companies. It is also stated that with the recent acquisition of Auctus Pharma (APL), the company has expanded product offerings and added new customers. It is emphasisized that Granules is expected to achieve 25%CAGR in revenues, 30%CAGR in EBIDTA and 33%CAGR in net profit over the next three years.
Yet another resource to understand the working of the Company is its “Investors Presentation” which is loaded with information about the Company’s past and future activities.
Now, if you look at the litmus test formulated by the Motilal Oswal Wealth Creation Study, you will find that Granules India meets most the factors. One, Granules India is a small cap with a market capitalisation of only Rs. 1500 crore. Second, it does have an impressive track record of performance. Third, its products are obviously in great demand and there is no reason that this will change. Fourth, as regards the management’s competence, it cannot be doubted given the past track record. As regards the management’s integrity, the Company has been in existence since 1991 and there are no red flags yet.
So, it does look like the Company is on the right path to become a 100-bagger as foreseen by Motilal Oswal. Whether it will in fact reach that lofty goal remains to be seen.