Private Client Research

Rating

Buy

Sector

Pharmaceuticals & Drugs - API

Company

Granules India Ltd

Pharmaceuticals & Drugs - API

July 23, 2020

Sensex: 38140.47

CNX Nifty: 11215.45

NSE: GRANULES

BSE: 532482

Reco Price

Rs. 226

3 years to get optimum return

Date

July 23, 2020

Sensex

38140.47

CNX Nifty

11215.45

Exchange

Code

NSE

GRANULES

BSE

532482

Stock Data

CMP (Rs)

280.65

Face value (Rs)

52 Week Range (Rs)

276.40 - 84.00

Market cap (Rs Crores)

6931.71

Price To Book Value (x)

3.73

P/E Ratio (x)

19.87

EV/EBIDTA (x)

12.42

One Year indexed Stock Performance

Granules India Ltd Sensex

Return (%)

12m

36m

Absolute

33.00

74.64

225.74

97.26

Sensex

7.65

19.70

0.42

18.28

Shareholders

(in %)

31-Mar

Promoter

42.13

Public

57.87

Others

Total

100

+91 22 6639 3000

research@stockaxis.com

Profile

Granules India Ltd (Granules) has created a leadership position in several generic drugs on the back of product-focused, vertically integrated business model. The company has a strong presence in ‘first line of defence’ products including Paracetamol, Ibuprofen, Guaifenesin and Metformin. A major part of the company’s revenues is from exports to the US and Europe. The company’s key customers include some of the leading generic and branded pharmaceutical companies. The company has grown to become a knowledge driven, R&D focused, multi-product organization, with inherent strength in efficient manufacturing of high-volume pharmaceutical products. Over the past 34 years, the company has worked towards strengthening its core through its five products and is, today, an integrated player with a strong market presence. The company’s focus is on forward and backward integration; to do this, Granules is building its presence in new areas, segments and divisions to reach its target.

A vertically integrated player in pharmaceutical manufacturing having unparalleled efficiencies through process innovation.

Rationale for Investment

Established player with integrated business model:
Over the years, Granules has evolved from being an API (Active Pharmaceutical Ingredients) manufacturer to an entity with strong presence across the value chain in the pharmaceuticals industry, thus establishing itself as a complete global pharmaceutical player with presence in APIs, PFIs (Pre-formulation Ingredients) and FDs (Finished dosages). From a commercial perspective, its vertical integration approach gives it a competitive advantage for both drug substance and the drug products in niche areas.

Expanding its product basket with economies of scale:
The company is expanding its product basket to address the prospective demand across several markets while also increasing the market share of existing products. It added two new molecules to its existing core portfolio in FY20 and is expected to launch nine products in FY21. The company possesses industry leading batch size for manufacturing PFIs and is among the largest in APIs in its core business product portfolio. This large-scale production helps it reduce production costs and improve manufacturing efficiency.

Capacity Expansion to provide impetus to growth
The company had incurred capex in FY2020 and considering the robust demand for its products, we expect the facilities to achieve full capacity utilization levels by the end of FY2021. Further the company has initiated a capacity expansion plan wherein the company shall be investing Rs 350-400 crores in FY2021 and around Rs 300 crores in FY2022, both funded through internal accruals. The capex would be towards expanding existing facilities and setting up new facilities thus providing clear outlook on the company’s capability to cater to the additional demand going ahead.

Focus on R&D capabilities
The company is sharpening its competitive advantage with intellectual property-protected innovation for limited competition opportunities. It has a unique portfolio with a combination of high volume molecules and complex niche products whereby majority of R&D spend is done in high volume core business. The company’s strong R&D capabilities are the driving force for current and future momentum and growth.

COVID-19 Impact
The company’s products and R&D programs will have minimal impact as it caters to the essential items category. The company continues to have normal supply levels for most of its products and supply of its medicines will remain at normal levels throughout the pandemic.

Key Risks
Delay in product launches in the US market may impact the business operations.

Negative outcome of USFDA inspection at manufacturing facility.

Industry

The US market accounts for 37-39% of Indian formulation exports. More than 50% of India’s incremental exports over the past five fiscals was to the US. Over fiscals 2013-16, exports growth was at a strong ~18% CAGR, driven by patent expiry of blockbuster drugs over 2012-14. However, growth fell to ~2% CAGR over fiscals 2016-19 on account of pricing pressures experienced during fiscals 2017 and 2018. Fiscal 2019 has been a year of recovery with abating pricing pressures and players moving away from conventional generics to limited competition molecules. Exports growth remained at double digits in fiscal 2020 as well on back of new launches, especially limited competition, and complex drugs.

During the past five years, pharma exports to European markets clocked a slower 6-7% CAGR owing to stricter pricing regulations and adverse currency movements. Even the United Kingdom (UK) and Germany, which traditionally had less stringent pricing mechanisms, introduced regulations to control the government’s healthcare expenditure. However, we estimate pharma exports grew ~11% in fiscal 2020. Sharp currency depreciation has also aided the exports.

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Particulars	Mar-18	Mar-19	Mar-20	Mar-21E	Mar-22E
Net Sales	1684.62	2279.20	2598.60	3197.20	3822.90
Raw Materials Consumed	896.32	1255.56	1280.93	1539.45	1828.70
Gross profit	788.30	1023.64	1317.67	1657.75	1994.20
Margins%	46.80%	44.90%	50.70%	51.90%	52.20%
Employee Cost	165.21	209.82	259.03	315.30	375.10
Other Expenses	344.68	429.79	511.80	619.30	738.20
EBITDA	278.42	384.04	546.84	723.15	880.90
Margins%	16.50%	16.80%	21.00%	22.60%	23.00%
Depreciation	76.20	105.48	136.95	161.76	183.28
EBIT	202.22	278.56	409.89	561.39	697.62
Other Income	10.84	26.68	36.55	30.39	33.89
Interest	33.06	28.46	27.02	25.28	22.28
Profit Before Taxation & Exceptional Items	180.00	276.78	419.42	566.50	709.23
Exceptional Income / Expenses			27.73
Profit Before Tax	180.00	276.78	447.15	566.50	709.23
Provision for Tax	63.40	89.11	115.70	141.60	177.30
PAT	116.60	187.67	331.40	424.90	531.90
EPS	5.22	9.30	13.40	17.20	21.50

Source: Stockaxis Research, Company Data

Valuation

We expect the company to post strong growth on back of favourable product mix (increasing share of high margin PFI and FD Segment), cost efficiencies due to effective manufacturing process coupled with better utilization of plants. The company is witnessing surge in demand across segments and we expect the same to sustain going ahead majorly supported by strong product pipeline, expanding into new geographies, and benefits of incremental capacities. The stock is currently trading at PE of 10.5x FY22E EPS and we expect 80-100% returns in next 2-3 years

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