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Granules India Ltd>
  • CMP : 324.3 Chg : 6.10 (1.92%)
  • Target : 345.0 (35.29%)
  • Target Period : 12-18 Month

20 May 2022

Revenues growth amid persisting headwinds…

About The Stock

Granules is a large-scale vertically integrated company that manufactures API, intermediates and finished dosages and has seven manufacturing facilities along with B2B & B2C marketing & distribution.

  • Revenue mix FY22: Formulations – 52%, API (API+PFI) – 48%
  • Top five products (Paracetamol, Ibuprofen, Metformin, Methocarbamol, Guaifenesin) contributed 81% to FY22 revenues
Q4FY22

: Granules’ revenue growth in this quarter was mainly on the back of higher selling price realisation from Paracetamol and new launches in the US.

  • Sales were up 29% YoY to ₹ 1030 crore
  • EBITDA was at ₹ 193 crore, down 5% YoY with margins at 18.7%
  • Adjusted PAT was at ₹ 111 crore (down 13% YoY)
What should Investors do?

Granules’ share price has grown by ~1.67x over the past five years (from ~₹ 148 in May 2017 to ~₹ 247 levels in May 2022).

  • We maintain BUY on the back of 1) launches lined up across geographies along with incremental contribution from MUPS block, 2) focus on backward integration, 3) initiatives like passing on price hike to customers, and 4) compelling risk-reward matrix based on FY24E earnings
Target Price Valuation

Valued at ₹ 345 i.e. 14x P/E on FY24E EPS of ₹ 24.6 

Key Triggers for future price performance
  • Twelve launches lined up for US with market size of ~ US$3.6 billion in FY23
  • Ability to pass on input cost inflation and margins improvement through focus on cost management
  • Extending its core products via additional strength/different forms in US, launching in other geographies may provide better operating leverage
  • In the US, it also focuses on select small but high value launches where competition is less, which bodes well in a crowded generics market
  • Timely completion of new block construction in Gagillapur and new initiatives for backward integration in key molecules like paracetamol and metformin, along with rationalising R&D portfolio
New Stock Ideas

Apart from Granules, in healthcare coverage we like Laurus.

  • Laurus is evolving as a strong vertically integrated player with strong order book visibility and incremental traction from custom synthesis
  • BUY with a target price of ₹ 690

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 2,279.2 2,598.6 3,237.5 3,764.9 21.7 4,362.3 4,953.3 14.7
EBITDA 384.1 525.3 853.6 722.2 19.5 863.2 1,053.1 20.7
EBITDA Margins (%) 16.9 20.2 26.4 19.2 - 19.8 21.3 -
Net Profit 187.7 309.9 549.5 412.8 24.2 486.6 610.6 21.6
EPS (Adjusted) 9.5 12.4 22.2 16.6 - 19.6 24.6 -
PE (x) 32.5 22.9 14.0 15.3 - 13.0 10.4 -
EV to EBITDA (x) 22.4 15.8 9.7 9.7 - 8.0 6.2 -
RoCE (%) 11.8 15.2 24.0 15.6 - 16.8 18.6 -
RoE (%) 15.5 16.7 25.3 16.0 - 16.0 16.9 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q4FY22 Results: Revenues grew amid margin pressure

  • Revenues grew 29% YoY to | 1030 crore, driven by YoY growth of 78% in PFI to | 257 crore and 28% growth in API to | 248 crore. Formulations grew 14% YoY to | 525 crore. EBITDA margins fell 656 bps YoY to 18.7% due to lower gross margins (down 834 bps YoY) and higher other expenditure. EBITDA de-grew 5% YoY to | 193 crore and adjusted PAT declined 13% YoY to | 111 crore. Delta vis-à-vis EBITDA was mainly due to higher tax expense being partially offset by higher other income, lower interest and tax expense
  • Granules’ revenues growth in this quarter was mainly on the back of higher selling price realisation from Paracetamol and new launches in the US. EBITDA margin drop was on account of pricing pressure in the US and also increase in cost of KSMs, solvents and increase in logistic cost. Two positive takeaways being - 1) sequential improvement in margins despite adverse business condition arising out of supply constraints of Para Amino Phenol (PAP), other input price cost increase and logistic cost increase and 2) share of non-core molecules increased to 19% in FY22 from 16% last year. Granules remains a decent player with clear vision to play on its strength of economies of scale and gradual expansion into more complex products/forms to improve margins

Q4FY22 Earnings Conference Call highlights

  • FY22 was a challenging year for the company in the backdrop of inflation in raw material, solvents and catalysts; Global supply chain challenges; Geo-political crisis and pricing challenge in US
  • Other raw material supplies ex-PAP is smooth but prices have either gone up or remained elevated. Granules is able to pass on the price rise in B2B business while in B2C company can only pass the hike from Q2FY23 due to terms of contract agreements. The management guided for biggest PAP producer to resume operations in next couple of weeks
  • Inflation: Raw material increased 60% YoY, solvents increased 40-70% YoY and freight cost increased 70% YoY
  • US is experiencing high double digit price erosion (highest of last 10 years). Granules launched five products in FY22 and plans to launch 12 products in FY23 with addressable market size of ~ US$3.6 billion. The management has guided for better growth from the US in FY23. In EU, Granules launched five products in FY22. EU will continue to operate in partnership model
  • In the US, Granules has 24 Rx products and 10 OTC products. Majority of formulations growth in this quarter was driven by US. The company guided for 17 finished dossiers launch across geographies over next two years
  • Going forward, Granules is looking to creating tech platform to bring innovation for 1) R&D in APIs and formulations, 2) Technical excellence in IPs, 3) B2B business in value added APIs and 4) commercial excellence in new product launches and core molecules
  • Granules aspires to provide CMO services from oncology blocks, validation was done last quarter while commercial supplies would begin post regulatory approvals
  • MUPS block will start contributing revenues from Q2FY23 onwards. Granules launched two MUPS products while six more are to be launched
  • China supplier would account for 15-20% while rest would be ex-China suppliers. The management is looking for backward integration for paracetamol and metformin
  • Capex: FY22: | 397 crore while guidance for FY23 and FY24 at | 600 crore
  • R&D expense for FY22 at | 143 crore, guidance for | 160-165 crore in FY23.
Variance Analysis
 
  Q4FY22 Q4FY21 YoY (%) Q3FY22 QoQ (%)   Comments
Revenue 1,030.0 799.3 28.9 996.8 3.3   YoY growth on back of higher selling price realisation from Paracetamol and new launches in US
Raw Material Expenses 526.0 341.6 54.0 531.9 -1.1    
Gross margins (%) 48.9 57.3 -834 bps 46.6 229 bps   Gross margin was impacted due to inflation in KSMs and solvents along with high double digit price erosion in US
Employee Expenses 108.2 99.9 8.3 105.3 2.7    
Other Expenditure 203.1 155.9 30.3 185.8 9.3    
Total Operating Expenditure 837.3 597.3 40.2 823.0 1.7    
EBITDA 192.7 202.0 -4.6 173.7 10.9    
EBITDA (%) 18.7 25.3 -656 bps 17.4 128 bps   EBITDA margin declined YoY due to lower gross margins along with higher logistic cost (up 70% YoY)
Interest 6.4 6.8 -6.7 4.6 38.5    
Depreciation 40.2 44.5 -9.7 39.2 2.4    
Other income 4.0 3.3 20.8 4.9 -18.6    
PBT before EO 150.1 154.0 -2.5 134.8 11.4    
Less: Exceptional Items 0.0 0.0 0.0 0.0 0.0    
PBT 150.1 154.0 -2.5 134.8 11.4    
Tax 39.1 26.4 48.1 33.9 15.4    
MI & Share of loss/ (gain) asso. 0.0 0.0 0.0 0.0 0.0    
Adj. Net Profit 111.0 127.6 -13.0 100.9 10.0   Delta vis-à-vis EBITDA was mainly due to higher tax expense being partially offset by higher other income, lower interest and tax expense
Key Metrics              
API 247.8 193.8 27.9 313.0 -20.8    
PFI 256.8 144.4 77.8 226.0 13.6    
Formulations 525.4 461.1 13.9 458.0 14.7    
 

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