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Strong end to FY21; on track to develop product/add capacity

Spike in KSM prices a hiccup in near-term earnings growth

* GRAN delivered an in line performance in 4Q and posted its highest ever sales/EBITDA/PAT on an annual basis in FY21. This was largely led by strong traction in ingredients (PFIs) and formulations (FDs). While the company is on track to expand capacity/develop products, a sharp increase in prices of select key starting materials (KSM) may hinder its near-term performance.

* We lower our FY22E/FY23E EPS estimate by 11%/10% to factor in a price increase/reduced availability of KSM like para-aminophenol (PAP)/acetic anhydride and lower operating leverage. We value GRAN at 15x 12-months forward earnings to arrive at our TP of INR420. We remain positive due to its: a) healthy ANDA pipeline for the US market, b) increasing share in the FD/PFI segment, and c) geographic expansion. Maintain Buy

Superior product mix/better operating leverage drives earnings

* Sales grew 33% YoY to INR8b (est. INR8.5b), led by 84% growth in intermediates (PFI; 18% of sales) and 34% growth in FDs (58% of sales). API segment grew moderately (9% YoY) in 4QFY21.

* Gross margin expanded 380bp YoY to 57.3% due to increased contribution from the PFI/FD segment. EBITDA margin expanded at a higher rate (490bp YoY) to 25.3% (est. 23.8%) due to lower other expense (down 140bp YoY as a percentage of sales).

* EBITDA grew 66% YoY to INR2b (in line) in 4QFY21.

* Adjusted PAT almost doubled YoY to INR1.3b (est. INR1.3b) due to better profitability and lower tax rate in 4QFY21.

* Sales/EBITDA/PAT grew 25%/59%/67% YoY to INR32.4b/INR8.7b/INR5.5b in FY21.

Highlights from the management interaction

* The management has guided at INR10b capex to be spent over the next three years.

* About INR1.8b would be spent for capacity build-up on MUPS based technology, INR2.5b would be spent on API capacity expansion, INR3.2b would be spent on a greenfield FD facility, INR300-400m would be spent to expand Paracetamol, Metformin capacity, and the remaining would be towards maintenance capex.

* About seven ANDAs would be launched over the next 3-6 months. GRAN launched ~12 products across regions in FY21.

Valuation and view

* We expect an increase in raw material costs as well as short term unavailability to impact revenue and earnings in 1HFY22E, with a gradual improvement expected from 2H, as more raw material suppliers start commercial operations over the medium term.

* We have cut our earnings estimate by 11%/10% and subsequently expect 16%/15%/10% revenue CAGR from PFI/FDF/API over FY21-23E.

* The earnings CAGR would moderate to 10% over FY21-23E. Build-up of ANDA filings, increasing dossier filings in Europe and RoW markets, geographic expansion in the PFI business, and capacity ramp-up in the API and FD facilities is enabling the company to prepare itself to override the KSM hurdle and return to the healthy growth path from 2HFY22E onwards.

* We value GRAN at 15x 12-month forward earnings to arrive at a TP of INR420. Maintain Buy.

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