Stock Fundamentals

Granules India: A pain reliever

Dhuraivel Gunasekaran | Updated on March 30, 2019 Published on March 30, 2019

Changing product mix and scaling up of capacity should benefit the company

It’s been a bumpy ride for the stock of active ingredients and drug formulations maker, Granules India, over the last one year — it fell about 33 per cent from its September 2018 high. Investors’ sentiment was hit due to subdued revenue growth in the active ingredients and intermediaries businesses. However, the stock has bounced back; it has risen by 37 per cent over the last one month along with the broader markets, as investors cheered its recent quarter’s numbers.

After putting up a dismal show in FY18 due to increase in raw material prices and a delay in the revival of contract manufacturing orders, the company reported a stable set of numbers over the last three quarters. Limited competition in the finished formulation dosages business and improved realisations in the active ingredients and intermediaries segments were the key factors for the higher revenue growth in recent quarters.

The company’s growth prospects over the medium to long-term look robust, given its changing product mix in favour of the high-margin formulations business, optimal utilisation of increased capacities for the core business and scaling up of US generics operations. The company’s large capex spend over the last three years to expand its capacities and R&D capabilities should aid the revenue growth of the company, going ahead.

 

At the current price of ₹114, the stock trades at a little over 10 times its estimated 2019-20 per share earnings. This PE multiple is lower than the valuations that other mid-tier pharma players such as Suven Life Sciences, JB Chemicals and Caplin Point Laboratories enjoy — 15 to 23 times(estimated on FY20 earnings).

Investors with a long-term perspective can buy the stock.

Robust business model

Granules India is one of the leading manufacturers of molecules such as Paracetamol, Metformin HCL, Ibuprofen, Guaifenesin and Methocarbamol. It supplies APIs (active pharmaceutical ingredients) and PFIs (pharmaceutical formulation intermediates) to global clients on a contract basis. Its formulation business (FD) comprises both direct market sale and contract manufacturing. While North America is the key market for the company — accounting for about 52 per cent of the revenue in the third quarter of 2018-19 — Europe (13 per cent), India (21 per cent) and Latin America (10 per cent) are also significant contributors.

In the nine months ended 2018-19, Granules’ consolidated revenue grew by 40 per cent (year-on-year) to ₹1,666 crore and net profit was up by 54 per cent to ₹173 crore. The company’s operating margin stood at 21 per cent during the period.

With stabilisation of raw material prices, regulatory approvals in place and new NDA approvals, the company’s growth momentum is expected to continue in the subsequent quarters.

Change in business mix

Over the past few years, the company revisited its strategic road map by focussing on high-margin products. It has shifted its product portfolio split of PFI, API and FD from 32:37:31 in 2012-13 to 17:34:49 in 2017-18.

 

This has benefited the company as its finished dosages business registered a healthy growth of 27 per cent (compounded annualised rate) over FY13-18, which led to higher profitability and improved utilisation of its existing capacity. In the nine month ended 2018-19, the finished dosage segment grew 59 per cent, while APIs registered a 46 per cent growth.

With expansion in formulations, the business mix is expected to change further and aid margin growth. While strengthening its base API business, the company is also focussing on enhancing the formulations portfolio.

Scaling up of US business

The US has been the key focus geography for the company. Granules is growing at a brisk pace in this region, despite market specific challenges, thanks to its complex products portfolio. The company is focussing on strategic portfolio selection in the US, primarily niche and limited-competition products.

Partnering Hikma, the company launched the Methergine generic drug in the US in June 2018 and has captured over 30 per cent of the US market share in the segment. The gain from the drug looks promising for the company as it is expected to add 15-20 per cent to its earnings for FY2019. Methergine generic is a fairly complex and limited-competition product (Lupin is the only other player in the US currently in this segment).

The company has filed 21 ANDAs (Abbreviated New Drug Applications), of which 11 have been approved. The US business is likely to see healthy growth due to the ramp-up of the key molecules — Methergine, Methocarbamol, Ibuprofen and Metformin. The management has guided for filing 10 to 12 ANDA in FY19. Simultaneously, the company is working towards filings in Europe and other markets.

The management is confident of achieving an annualised growth of 20 per cent in the overall revenue in the next two years and 25 per cent in net profit, led by approvals, commencement of oncology API supplies and improved performance by the Omnichem JV.

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