A quarter of record-high revenue/EBITDA/PAT
FD/PFI – the backbone of strong earnings trajectory
* Post delivering spectacular earnings growth (76% YoY) in FY20, Granules India’s (GRAN) posted strong revenue/EBITDA/PAT in 1QFY21. This was led by new launches in formulations (FDs) and better market penetration for intermediates (PFIs).
* We have raised our EPS estimate by 12%/6% for FY21/22E to factor in (a) the increased FD business on account of ANDA launches in the US, (b) addition of new molecules in the API segment, (c) increased traction in existing products, and (d) improving profitability due to backward integration. We value GRAN at 14x 12M forward earnings to arrive at price target of INR315. Re-iterate Buy.
FDs/PFIs drive revenue growth as well as profitability
* GRAN’s 1QFY21 sales were up 23.6% YoY to INR7.4b (v/s est. INR6.7b), led by 35% YoY growth in FDs (INR3.9b; 52% of sales) and 45% YoY growth in intermediates (INR1.4b; 19% of sales). API sales (29% of sales) declined moderately by 1% YoY, affecting overall growth to some extent.
* GRAN made provision of (a) INR54m for raw material consumed, and (b) INR97m for other expenses related to the voluntary recall of 12 batches of Metformin Hydrochloride due to detection of impurities above permissible limits.
* Adjusting for the same, Gross Margin (GM) for the company stood at 60.3% and expanded 990bp YoY, led by larger share of FDs and PFIs.
* EBITDA margin came in at 27% (v/s est. 21%) and expanded at lower rate of 710bp YoY. Improvement in GM was offset to some extent by higher employee cost/other expenses (+180bp/+100bp YoY as % of sales).
* EBITDA grew 67.5% YoY to INR2b (v/s est. INR1.4b).
* Adjusted PAT grew at a lower rate of 47.5% YoY due to profit from JV (INR255m) in 1QFY20. Adj. PAT came in at INR1.2b for the quarter.
Highlights from management commentary
* GRAN has guided for 23% EBITDA margin for FY21. It has also guided for 30%/25% YoY PAT growth for FY21/FY22E.
* Gross Debt stood at INR8.7b and capex is expected at INR3.5-4b for FY21. Capex would be funded internally and net debt should be steady in FY21.
* The recent recall in Metformin was related to the only 750mg ER version. The company does not expect Metformin sales to be impacted due to shift to other concentrations (Immediate Release and 500mg ER version).
Valuation and view
* We expect earnings CAGR of 23% over FY20-22E, led by 17%/20% sales CAGR in FDs/PFI revenue and 310bp EBITDA margin expansion (with an increased share of better-margin products and backward integration).
* GRAN has multiple growth levers such as (a) ANDA pipeline for US generics should drive increased share of formulation for developed markets, (b) enhanced reach for core molecules, and (c) reducing opex through backward integration. Accordingly, we ascribe 25% premium to its 5-year average of 11x P/E to factor in product/geographic diversification and backward integration. We value GRAN at 14x 12M forward earnings to arrive at a TP of INR315/share. Maintain Buy.
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