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Improved business trajectory fueled by US ANDA approvals

* After a lull of ANDA approvals in FY22/FY23, the pace of ANDA approvals has picked up for GRAN.

* The company has already received 3 ANDA approvals in FY24 till date (vs. 4 in FY23). It is optimistic about receiving additional approvals in the remaining period of FY24.

* Also, the recent approvals include certain limited competition products and/or certain products, where GRAN has a competitive edge over its peers in the manufacturing value chain. Accordingly, we expect potential sales of USD40m from recent approvals on an annualized basis.

* This benefit may be adversely impacted to some extent due to IT security issue.

* Considering a better outlook for US ANDA business front and ongoing efforts to backward integrate core products such as Paracetamol/Metformin, we remain positive on GRAN. We value GRAN at 13x 12M forward earnings to arrive at a price target of INR350. We reiterate our BUY rating on the stock.

Efforts underway to enhance US growth prospects

* GRAN has got a healthy boost to its US outlook as a result of receiving multiple approvals over the past 3-5 months.

* Particularly, the recent approval for Metoprolol Succinate Extended release (ER) is a limited competition complex product.

* The current annual U.S. market for Metoprolol Succinate ER Tablets is approximately USD321m, according to MAT Mar 2023, IQVIA/IMS Health.

* Currently, there are 5+ companies that have ANDA approval for this product. However, just 2-3 are active suppliers for this product in the US.

* DRRD is the market leader in generic metoprolol succinate, with a market share of almost 36%. Teva is another competitor in this product with a current market share of 15.7% (May’23). However, its market share has been experiencing a downward trend.

* Metoprolol Succinate is a long-acting beta blocker that works specifically on the heart. It works by slowing down the heart rate and makes the heart more efficient at pumping blood around the body.

* Other interesting approvals include Losartan (used to treat hypertension), Levitaricetam/Gabapentin (used for the treatment if epilepsy), and Venlafaxine.

* With the launch of the big products, we expect GRAN to gain traction, leading to growth in US business. We expect it to achieve sales of USD20m sales in FY24 by scaling up its operations (particularly Metoprolol Succinate) through new launches and expanding market share in existing products.

IT security incident to impact 1QFY24 performance

* GRAN’s operations were affected by an IT security incident in the last week of May’23. While GRAN implemented measures to isolate the network and initiated recovery/restoration process, it affected business operations due to changes in IT systems.

* This also resulted in a gestation period to meet regulatory expectations, fulfill qualifications, and fine tune the quality and production processes.

* We expect that this issue will have an impact of ~2% on FY24 sales

New launches/compliant on regulatory front key for growth in US

* GRAN has 57 ANDA approvals, including two tentative approvals and 15 products pending for approval as of March’23. In FY23, GRAN has received four approvals.

* The company has received three observations on the US plant of Gagillapur in Hyderabad; however, the other plants are compliant.

* Additionally, it has received approval from USFDA on new packing facility at Varginia, US.

* Also, the management has guided for increasing filing in the US for both API and formulations. It expects meaningful product launches to start from 2QFY24.

Valuation and view

* We expect a 17% earnings CAGR, a 12% sales CAGR in Intermediates/API segment, and a 10% CAGR in the formulation segment. This would be further supported with a 140bp margin expansion due to better product mix and operating leverage.

* GRAN is implementing efforts to a) scale up capacity for its existing products, b) to minimize cost through backward integration for Paracetamol/Metformin, c) building an ANDA pipeline and implementing project to avail carbon free energy.

* We value GRAN at 13x 12M forward earnings to arrive at a price target of INR350. We reiterate our BUY rating on the stock.

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