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    215% jump in 2020, 3,678% in 10 years, this midcap is seeing an adrenaline rush

    Synopsis

    The scrip had four 'buy', three 'outperform', one 'underperform' but no 'sell' rating on the publicly available Reuters Eikon database as of Monday, October 26.

    iStock
    Motilal Oswal expects an earnings growth of 36 per cent compounded annually over FY20–23 and 830 basis points expansion in Ebitda margin led by addition of high-value products and better capacity utilisation.

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    NEW DELHI: This stock has thrived amid Covid uncertainty, and so has the company’s quarterly earnings.

    September quarter earnings were the highest for the drug maker in terms of sales, profit and margins.

    The stock has seen a 215 per cent jump in 2020 so far, making it a 3,678 per cent rally over the past 10 years. But analysts say it has still got enough juice to reward investors handsomely. Seen as one the best plays on ‘China + one’ theme, the stock is Granules India.

    The scrip had four 'buy', three 'outperform', one 'underperform' but no 'sell' rating on the publicly available Reuters Eikon database as of Monday, October 26.

    Analysts said the ramping up of fresh capacities, a shift in focus to the formulation business, growth in non-core product offerings and rising demand from the EU and Latin America would keep the company's fundamentals strong going ahead.

    “Granules has been expanding its reach steadily into the formulation business with a vertically-integrated model. This bodes well at a time when the generic supply model globally is likely to be redrawn in the post-pandemic era, making it more conducive for vertically-integrated players like Granules," ICICIdirect said in a note.

    Price targets for the stock suggest up to 29 per cent upside from its current level.

    Company background
    Vertically-integrated Granules India manufactures active pharmaceutical ingredients (API), pharmaceutical formulation intermediate (PFI) and finished dosage (formulation). Finished dosage accounts for 52 per cent of its revenues, followed by API at 32 per cent and PFI at 16 per cent. In terms of geographies, the US accounts for 53 per cent of Granules’ revenues, while the EU comes second with a 19 per cent share, followed by India at 15 per cent and Latin America at 8 per cent.

    The company produces core drugs such as Paracetamol, Ibuprofen (pain), Metformin (diabetic), Methocarbamol (muscle relaxant) and Guaifenesin (chest congestion control). It has one of the largest PFI and single-site formulation facilities in the world. It is also home to one of the world’s largest Paracetamol API facilities, analysts noted.

    Q2 earnings
    The drug maker reported a 70.82 per cent rise in consolidated net profit at Rs 163.63 crore for the September quarter compared with Rs 95.79 crore reported for the same quarter last year. Revenue from operations rose 22.7 per cent to Rs 858.12 crore against Rs 699.53 crore reported for the same period a year ago, it said.

    Brokerage Anand Rathi said these were the highest quarterly sales, margins and profit for the company.

    Earlier, the company had reported a 34 per cent rise in profit at Rs 114 crore for the June quarter, and a 44 per cent jump in March quarter profit at Rs 92.34 crore .

    For the September quarter, product rationalisation and new launches pushed the company’s gross margin by 929 basis points to 58 per cent. “Operating leverage and lower spending on research and development (R&D) were prime growth driver of Ebitda margin, which rose 935 basis points to 30 per cent," Anand Rathi said.

    What does the management say
    The management expects sales to the EU and Latin America to expand 800 basis points and 400 basis points to 28 per cent and 12 per cent, respectively, over FY20-23. The company also plans to launch newer products and enter newer markets within these regions.

    During the September quarter, the company received USFDA approvals for four products, out of which one has already been launched. The drugmaker has eight product approvals pending with the USFDA and is in the process of developing 11 more.

    Granules plans to launch two products in the second half of FY21 and expects approvals for its first MUPS (multiple-unit pellet system) product, which has a market size of $204 million. Overall, it expects to launch three products in FY21 to address a market of $1 billion.

    What do analysts say
    ICICI Securities says 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, bode well in the crowded generics market.

    The brokerage noted that API and PFI segments grew just 7.7 per cent in FY16-20 mainly due to captive consumption and capacity constraints.

    “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, Granules could be one of the prime beneficiaries of China + one play," it said.

    BP Wealth said the company’s focus on developing differentiated products such as controlled substances, modified & extended-release and oral suspensions can ensure better profitability. Its share of core molecules stood at 70 per cent of overall revenue in the September quarter compared with 85 per cent in FY20.

    Core molecules are sold high in volumes, but low in value.

    “The management has indicated that it would further reduce core molecules share to 50 per cent over next three to five years. Non-core products and ex-US markets such as the EU and LATAM would drive growth and margin expansion for the company. We believe FY21-23 to be much better on a revenue front on the back of a rampup in fresh capacities and the 7-8 (including limited competition products) US generic launches expected every year,” BP Wealth said.

    Stock Valuations
    Motilal Oswal expects an earnings growth of 36 per cent compounded annually over FY20–23 and 830 basis points expansion in Ebitda margin led by addition of high-value products and better capacity utilisation.

    “In addition to the traction in core molecules, Granules is building high-value and relatively low-volume products and manufacturing capacities to drive superior growth going forward. We value the stock at 16 times 12M forward earnings to arrive at a price target of Rs 500,” the brokerage said.

    On Wednesday, the stock traded about half-a- per cent higher at Rs 385 in a depressed market. Motilal’s price target suggests a 29 per cent upside from current level.

    "We like Granules’ clear vision to play on economies of scale and gradually expand into more complex products/forms to improve margins. Sustained margin expansion is likely to support FCF generation despite the brownfield capex lined up till FY23," ICICIdirect said. It maintained a price target of Rs 460 on the stock.

    At this price target, ICICIdirect is valuing the stock at 15 times estimated FY23 EPS of Rs 30.60.

    Anand Rathi has increased its price target for the stock to Rs 455 from Rs 330 earlier. It projects the formulations segment to grow 24 per cent over FY20-23.

    "The launch of formulations and a foray into newer regions are likely to drive revenue at 19 per cent CAGR and PAT at 30 per cent CAGR over FY20-23. Near-term growth is likely to be driven by the company’s foray into MUPS products, entry into newer markets and capacity addition in PFIs. Beyond this, its US pipeline and oncology products, too, should drive growth,” the brokerage said.
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    10 Comments on this Story

    md ismail30 days ago
    s
    md ismail30 days ago
    I convince with ramanath, which produces paracetamol, most of the pharma stocks are over valued, it's time to exit from pharma sector except few.
    Jayachandran Maruthia30 days ago
    FERMENTA BIOTECH (DUPINT) is not known to many as the only largest manufacturer of Vit-D in India.
    Vit - D cures covid 19 and is recommended by doctors through out the world. Share price is likely to hit price of rs 500 in six months time.
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