Granules India: A booster shot

Change in product mix and expansion in capacity are growth drivers

The stock of pharma company Granules India has done quite well over the past six months, while many of its large-cap peers have been on the backfoot due to regulatory actions by the US drug regulator FDA and increasing pricing pressure.

The stock now trades at ₹136, up 35 per cent from its November 2016 low. Despite the rally, the stock trades at about 18 times its trailing 12-month earnings, lower than the three-year average of 20 times.

Considering the company’s good growth prospects, investors with a long-term perspective can buy the stock. But given its small capitalisation (about ₹3,000 crore), exposure can be limited.

The company’s changing product mix in favour of the high-margin formulations business, expansion in its active pharmaceutical ingredients (API) business and ramp up in the US should translate into good growth in the coming years. Increased R&D spend could keep margins muted in the near term, but can boost long-term prospects.

Vertically integrated

Granules India has presence across the pharmaceutical manufacturing value chain — active pharmaceuticals ingredients (API), pharmaceutical formulation intermediates (PFI) and finished dosages (FD) formulations. The company enjoys leadership position in its core business of manufacturing Paracetamol, Metformin, Ibuprofen and Guaifenesin. It supplies APIs and PFIs to global clients on contracts. Its formulation business comprises both direct market sale and contract manufacturing. While North America is the key market for the company, accounting for about 42 per cent of revenue in 2016-17, Europe (25 per cent), India (18 per cent) and Latin America (10 per cent) are also significant.

Over the years, Granules India has changed its business mix from low-margin to high-margin products.

The company has shifted its product portfolio from PFI and API (61 per cent and 39 per cent respectively) in 2007-08 to PFI, API and FD (24 per cent, 38 per cent and 38 per cent) in 2016-17.

While this led to a reduction in the revenue in the initial period, there was sharp improvement in the company’s margins. With the expansion in formulations, the business mix is expected to be change further and aid margin growth. The company, while strengthening its base API business, is also focusing on enhancing the formulations portfolio.

Expanding capacity

Granules India is on an expansion mode to cater to strong demand. It is adding to its API manufacturing capacity with capital expenditure of ₹280 crore.

This will augment by three to four times the manufacturing capacity of its core molecules — Metformin and Guaifenesin — and increase Paracetamol manufacturing capacity by about 25 per cent.

The company has also initiated construction of a greenfield multi-product API capacity at Visakhapatnam for venturing into oncology and specialty business.

Further, the company is enhancing its API business by venturing into contract manufacturing in regulated markets through joint-ventures and acquisitions.

After the JV with China-based Biocause, Granules India has become one of the top five sellers of Ibuprofen globally. The acquisition of Auctus Pharma in 2013 has added to the company’s portfolio 12 APIs across various therapeutic areas such as CVS, GI and anti-histamine.

Recently, the company made new drug master filings from the Auctus’ facility and is expected to continue this in the complex product segment. This should provide a leg up to the company’s revenue. The company is also stepping up its presence in the US. The formulation facility acquired in Virginia in 2014 helps Granules introduce value-added complex molecules in the US market.

The R&D centre in Visakhapatnam helps in developing normal ANDAs while the Virginia centre helps develop complex ANDAs.

The company expects to file 20-24 ANDAs over the next five years with FDA. Currently, the company has 11 ANDA fillings, out of which five are approved by the FDA.

Further, the agreement with a US-based pharma R&D organisation ‘US Pharma’ will help the company manufacture and distribute their products in the US.

The company has also ventured into manufacturing and marketing private label OTC products to the retail chains in the US market.

Recently, the US FDA inspected Granules’ OmniChem facility in Visakhapatnam with six observations. The company has responded to that and is awaiting Establishment Inspection Report (EIR).

The other manufacturing facilities have regulatory clearances. Earlier, the company received a clean chit from Portugal’s health authority on re-inspection of its Gagillapur facility in Telangana.

The 50-50 joint venture with Ajinomoto Omnichem has helped the company enter the high-margin CRAMS market without major investments in R&D. The JV generated sales of ₹200 crore in FY17, the first full year of operation, with nearly 60 per cent capacity utilisation. With increasing capacity utilisation, the JV should add to earnings, going forward.

Strong financials

Granule India’s consolidated revenue grew by 4 per cent y-o-y to ₹1,435 crore in 2016-17. The company recorded operating profit of ₹309 crore; an increase of about 10 per cent with operating margin improving by more than 100 basis points to 21.5 per cent. Net profit grew 34 per cent y-o-y to ₹165 crore.

Granules expects revenue and profit growth of about 20 per cent, thanks to new capacity, strong growth in formulations and the Omnichem JV. Capex was about ₹337 crore last year; the company expects this to go up to around ₹600 crore in 2017-18.

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