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Broadly in-line Q3; attractive valuations currently; upgrading to a Buy

Driven by good API sales (paracetamol), Granules India reported healthy Rs11.5bn Q3 revenue (up 15% y/y). More sales of low-margin paracetamol API led to the gross margin shrinking 140bps q/q. With most expenses continuing sequentially, the EBITDA margin contracted 93bps to 20.2%. Higher interest and depreciation costs led to net profit growing only 23% y/y to Rs1.3bn. Market-share gains and growth are expected from the recent launches, while backward integration would boost gross margins. After the recent drop in the stock, it trades at attractive valuations of 13x/11x FY24e/FY25e EPS. Hence, we upgrade our rating to a Buy, with an unchanged TP of 370 (14x FY25e EPS).

Q3 revenue growth aided by paracetamol API sales. The 15% y/y revenue growth to Rs11.5bn, as we expected, was driven by more paracetamol API sales in the US. API sales (36% of sales) grew 31% y/y, while finished dosages (46% of sales) grew 14% y/y. As supply challenges are now behind, Granules is running at full capacity and planning to set up more capacities.

Q4 margins to be similar to Q3. Q3 had some impact in partner transition change in the US; the smoothening of logistics in the US is expected to take one more quarter. Higher interest costs are expected to continue in Q4 as well. With increasing capex, depreciation costs are escalating proportionally.

Capex plans ahead. Rs3bn to be incurred in 2023-24 for a formulations site, a DCDA site, enzymatic reactions and some flow chemistry initiatives. Granules has planned Rs20bn capex in the next 4-5 years for this green initiative (Greenko).

Valuation. At the CMP, the stock trades at attractive valuations of 11x FY25e EPS. We retain our Hold rating on it, with a higher TP of Rs370 (14x FY25e EPS). Risks: Rise in R&D expenses; adverse currency movements, rawmaterial price rises.

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