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Stock Tales - Granules India - ICICI Securities

Posted On: 2020-09-15 10:10:32

Incorporated in 1991 by first generation entrepreneur Krishna Prasad Chigurupati, Granules India (Granules) is a vertically integrated pharma player. Over the years, the company has been focusing on few basic but important global APIs like Paracetamol, Metformin, Ibuprofen, Guaifenesin, and Methocarbamol. With ~85% revenue contribution these products still remain the backbone of earnings with backward integration and economies of scale. Granules is now looking to rewrite its success story in other molecules with focus on formulations. We believe the company is well poised to extend its core strength by launching more complex/niche products besides volume based legacy products for future growth.

Formulation - Focus on fewer launches, higher market share

Granules' Formulation revenues grew 31% in FY16-20 to Rs. 1360 crore mainly due to timely launches and market share gains in both core and small but complex products like Methergine, along with extension of its core products launches in OTC segment. The company's vertically integrated business model, sustained market share in volume products and focus on select small but high value accretive launches where competition is less bodes well in the crowded generics market. Extending its core products via additional strength/different forms in the US and launching in other geographies is also likely to provide better operating leverage. We expect the company's formulation revenues to grow 21% in FY20-23E to Rs. 2411 crore.

API+PFI - Well poised to capture global opportunities besides complementing formulation foray

These segments grew just 7.7% in FY16-20E mainly due to captive consumption and capacity constraints. However, with new capacities getting commissioned (Vizag unit V) for multiple APIs and oncology blocks, we expect good traction in this space. The company is also working on backward integration for key APIs. Similarly, by already having critical mass globally in key APIs, we believe Granules could be one of the prime beneficiaries of 'China + one' substitute play. Overall, we expect 10.6% CAGR over FY20-23E owing to improved demand and capacity addition.

Valuation & Outlook

After achieving critical mass in commoditised but important products over the last few quarters, the company has been steadily expanding its reach into formulations with a vertically integrated model. This bodes well at a time when the generic supply script globally is likely to be rewritten in the post-pandemic era, which would be more conducive for vertically integrated players such as Granules. We like the company's clear vision to play on its strength of economies of scale and gradually expand into more complex products/forms to improve margins. Sustained margin expansion is likely to support FCF generation despite brownfield capex lined up till FY23E. We assign BUY rating to the stock with a target price of Rs. 430 (16x of FY23E EPS of Rs. 26.6).

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Shares of GRANULES INDIA LTD. was last trading in BSE at Rs.368.8 as compared to the previous close of Rs. 371.35. The total number of shares traded during the day was 194980 in over 4268 trades.

The stock hit an intraday high of Rs. 379.1 and intraday low of 361.85. The net turnover during the day was Rs. 72331696.

Source: Equity Bulls

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