Granules India -Focussed approach to operational excellence :: Centrum

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Rating: Hold; Target Price: Rs920; CMP: Rs807; Upside: 14%



Focussed approach to operational excellence



We maintain Hold rating on Granules India (GIL) with a target price of
Rs920 based on 12xSeptember’16E EPS of Rs76.4 due to good growth and
sustainable margins. GIL’s results for Q2FY15 were marginally below
our expectations. The company reported revenue growth of 16%YoY,
440bps improvement in EBIDTA margin to 17.0% and 47%YoY growth in net
profit. We expect the acquired Auctus Pharma (APL) to turn around by
the end of FY15. GIL has commercialised Abacavir API and plans to
launch additional 4-5 APIs in H2FY15. Key risks to our assumptions
include improved performance of global pharma market and regulatory
risks to its manufacturing facilities.

$ Revenue grows 16%YoY: GIL reported a revenue growth of 16%YoY to
Rs3.08bn from Rs2.66bn during the quarter. Sales composition was as
follows: finished formulations 40%, PFIs 28% and APIs 32%. However,
quarterly results were not comparable due to the acquisition of APL in
February’14.  Excluding APL, revenue growth was 6%YoY. APL reported
revenues of Rs251mn, EBIDTA of Rs(34)mn (margin of -13.5%) during the
quarter. We expect improvement in revenues from APL in H2FY15 and
additional revenues from the launch of Abacavir API in developing
markets.

$ Margin improves 440bpsYoY: GIL’s EBIDTA margin during the quarter
grew by 440bpsYoY to 17.0% from 12.6% due to a decline in material
cost and other expenses. The company’s material cost declined by
370bps to 55.2% from 58.9% due to the change in product mix and higher
capacity utilisation. Personnel cost grew by 60bpsYoY to 8.4% from
7.8%. Other expenses declined by 130bps to 19.4% from 20.7%. Going
further, we expect margin improvement due to higher capacity
utilisation and change in product mix with higher sale of
formulations.

$ Net profit grows by 47%YoY: GIL’s net profit for the quarter grew by
47%YoY to Rs222mn from Rs151mn due to margin improvement and lower tax
rate. The company’s interest cost grew by 83%YoY to Rs80mn from Rs44mn
due to the increase in working capital and term loan for APL
acquisition. Its depreciation was up by 113%YoY to Rs131mn from Rs62mn
due to the Gagillapur facility going on stream, APL depreciation and
change in depreciation rates.  GIL’s tax rate came down to 30.5% from
35.3% of PBT due to loss of APL. We expect the company to report
sustainable growth due to moving up the value chain leading to margin
improvement.

$ Recommendation and key risks: At the CMP of Rs807, the stock trades
at 18.5x FY15E EPS of Rs43.6 and 12.5x FY16E EPS of Rs64.6 and 9.2x
FY17E EPS of Rs88.1. We maintain Hold rating with a target price of
Rs920 based on 12x September’16E EPS of Rs76.4 with an upside of 14.0%
over CMP.  We expect the company to deliver superior performance due
to the acquisition of APL leading to the enlargement of product
portfolio and new product introductions. Key risks to our assumptions
include improved performance of global pharma market and regulatory
risks to its manufacturing facilities.



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