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Ease of cost factors to drive a better outlook

Exploring biotechnology as a new area of growth

*  GRAN delivered a better than expected 1QFY23 performance, led by better operating leverage. It intends to add biotechnology as a new lever of growth. Likewise, it has acquired a small biotech company, which adds fermentation-based capabilities.

* We raise our FY23/FY24 EPS estimate by 8% each, factoring in: a) reducing cost pressures in terms of raw materials as well as logistics cost, b) improvement in the availability of key raw materials for Paracetamol, and c) improving operational cost for the ANDA-related business. We continue to value GRAN 13x 12M forward earnings to arrive at our TP of INR370.

* We remain positive on GRAN on account of: a) its differentiated technologies for manufacturing, b) its robust ANDA pipeline, and c) easing of cost pressures in core molecules. We maintain our Buy rating.

Higher RM cost and other expenses drag profitability on a YoY basis

* Sales grew 20% YoY to INR10.2b (est. INR10.6b).

* Formulation (FDF) sales grew 21% YoY to INR5.5b (54% of sales). Intermediates (PFI) sales rose 38% YoY to INR2.4b (23% of sales). API sales grew 5% YoY to INR2.3b (23% of sales).

* Gross margin contracted by 460bp YoY to 49.6%, largely due to a change in the segmental mix.

* EBITDA margin contracted at a lower rate of 300bp YoY to 20.7% (est. 18.5%) due to better operating leverage. Employee cost/other expenses fell 60bp/110bp YoY as a percentage of sales.

* EBITDA rose 5% YoY to INR2.1b (est. INR2b) in 1QFY23.

* Adjusted PAT grew 6% YoY to INR1.3b (est. INR1.2b)

Highlights from the management commentary

* Prices of inputs and freight rate are softening. This downtrend is expected to continue, driving better profitability to some extent over coming quarters.

* The supply situation of a key raw material for Paracetamol has improved, with the Chinese manufacturer resuming operations. Also, a few Indian suppliers are being evaluated.

* The purchase of the biotechnology asset for INR200m will add fermentation to the company’s capabilities. GRAN intends to spend INR750m over the next 12 months on this space.

* The management intends to launch two-to-three ANDAs in FY23.

* It has guided at a capex of INR3b for FY23.

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