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On track to build product pipeline as well as capacity

Availability of key starting materials to improve over near term

* Granules India (GRAN) delivered a better-than-expected 1QFY22 performance, led by better off-take in the Intermediates (PFI) and Finished Dosage (FD) segments. The impact of the sharp rise in key starting materials (KSM) for Paracetamol was offset by controlled opex, driving better-thanexpected profitability during the quarter. The improved availability of KSMs and new launches would further enhance the performance going forward.

* We marginally tweak our EPS estimate for FY22/FY23E, factoring in a) the easing of the supply situation for KSMs and b) higher logistic costs. We continue to value GRAN at 15x 12M forward earnings to arrive at TP of INR440. We remain positive on GRAN on the back of a) a robust base business, comprising core molecules, b) an expanding portfolio and geographic reach, and c) operating cost efficiencies. Maintain Buy.

High cost of raw materials offset by controlled opex

* GRAN’s 1QFY22 sales grew 16% YoY to INR8.5b (est. INR8.2b).

* Growth was led by 24% YoY growth in PFI (INR1.7b; 20% of sales) and 18% YoY growth in FD (INR4.5b; 54% of sales). The Active Pharmaceutical Ingredients (API) segment (INR2.2b; 26% of sales) grew at a moderate rate of 6% YoY.

* The gross margin contracted 600bp YoY to 54.2% due to an increase in KSM prices, especially for Paracetamol, and a reduction in export incentives.

* The EBITDA margin contracted at a slower rate (330bp YoY) to 23.7% (est. 22%) on controlled other expenses (down 260bp as a percentage of sales).

* EBITDA was almost flat YoY at INR2b (est INR1.8b) in 1QFY22.  Adj. PAT fell 2% YoY to INR1.2b (est. INR1.1b) on a slightly higher tax rate.

Highlights from management commentary

* GRAN has guided for an 8–10% sales CAGR in core molecules and 50% sales CAGR in non-core products over the next 2–3 years.

* It has guided for an overall revenue/PAT CAGR of 20% over the next 2–3 years.

* Given that the current capacity would be optimally utilized over the next 2– 3 years, GRAN is building a facility at the Genome Valley, scheduled to be ready by FY25.  FY22 capex would be ~INR4b. Capex for 1QFY22 stood at INR1.6b.

* The KSM supply for Paracetamol is expected to ease with an increase in the number of Indian suppliers as well as the resumption of supply by a Chinese source.

* GRAN had a successful USFDA inspection at its Virginia facility recently and received an Establishment Inspection Report (EIR) in just 25 days.

Valuation and view

* We tweak our EPS estimate for FY22/FY23E to reflect lower raw material costs and a continued increase in freight costs. We expect a 16%/16%/10% CAGR in revenues from PFI/FD/API over FY21–23E.

* (a) Continued ANDA filings and pipeline buildup for the US, (b) geographic expansion for FDFs/PFIs in the Europe and RoW markets, (c) enhanced capacity to meet supply requirements, and (d) ramp up in the market share of core molecules are likely to result in an 11% PAT CAGR to INR6.8b over FY21–23E. We value GRAN at 15x 12M forward earnings to arrive at TP of INR440. Reiterate Buy.

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