It only gets better!
* GRAN’s Q1 print was solid, with revenue/EBITDA beating our estimates by 9%/18% − the best ever for the company. Gross margins rose 600bps qoq, helped by higher realizations, product rationalization and better mix.
* Current quarter GMs are largely sustainable, as per management, and should help drive a 30% increase in PAT in FY21. Over the last four quarters, GRAN’s gross margins have improved by ~900bps and we factor in 600bps improvement in GMs yoy in FY21.
* Balance sheet improvement continued, with leverage further down (net debt/EBITDA at 0.8x vs. 1.2x in FY20), though FCF generation was relatively weak (Rs373mn) due to higher WC. In line with management guidance, promoter pledge fell to ~8% from ~37%.
* We raise FY21/22/23 EPS by 13%/8%/10%, factoring in higher margins. With strong operating performance and a leaner balance sheet, we expect GRAN to re-rate. We retain Buy with a revised TP of Rs340. GRAN remains our top small cap pick and OW in EAP.
Q1 surprised positively with a 9%/18% beat in revenue/EBITDA, led by strong growth in the PFI (+42%yoy) and FD businesses (+35%yoy). The sharp improvement in GMs (+600bps qoq) was the key positive surprise and management guided to sustain it as the formulation business continues to gain. Over the last four quarters, GMs have improved by ~900bps, largely led by a ramp-up in the finished dosage business (up from 48% to 52.5% of sales). EBITDA of Rs1.8bn (vs. Rs1.6bn est.) includes a one-time Rs150mn hit due to metformin recall and Rs130mn Covid-19 related expenses (will partly continue). R&D spends were lower (Rs200mn vs. Rs1.5bn guidance in FY21), but should increase. Overall, GRAN expects to sustain margins at around 23% in FY21 (vs. 25% in Q1).
Leverage comes down, but FCF generation weak:
Net debt/EBITDA is further down to 0.8x (vs. 1.2x in FY20), though FCF generation (at Rs373mn) was relatively weak due to higher working capital. With capacities running at 130-140% higher utilizations (vs. a year ago), GRAN is investing in a multi-purpose sustained release (SR) facility as well as into augmenting API/KSM capacities and increased its capex guidance to Rs3.5-4bn in FY21 (vs. Rs1.5bn earlier). This would be funded through internal accruals. After the buyback, the promoter pledge is down at 8% (vs. 37% earlier) and is guided to come down to zero by FY21 end.
We Increase FY21/22/23 EPS by 13%/8%/10%, factoring in higher margins, and revise the TP to Rs340 (from Rs245), valuing the stock at 16xJun’22E EPS (vs. 13xMar’22E earlier). With strong operating performance (22% EPS CAGR over FY20-23) and a leaner balance sheet, we expect GRAN to re-rate. GRAN is an OW in EAP and our top small cap pick.
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