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Superior product mix drives profitability Expect healthy ANDA launches over the next 12-15 months

* GRAN delivered an in line performance in 3QFY21. It sustained its strong earnings momentum led by Intermediates (PFI) and API segments. The delay in ANDA launches impacted the YoY growth rate for the Formulations segment. The company remains on track for capacity expansion at its Visakhapatnam and US sites to cater to growth in FY23-24.

* We have tweaked our FY21E/FY22E/FY23E EPS estimate to factor in: a) delay in ANDA launches, b) higher raw material prices, and c) withdrawal of export incentive benefits. We continue to value GRAN at 16x 12 months forward earnings to arrive at our TP of INR460/share. We remain positive on the back of niche product pipeline and healthy base business. Reiterate Buy.

YoY earnings growth trajectory strengthens further in 3QFY21

* Sales grew 20% YoY to INR8.4b (v/s our estimate of INR8.2b), led by: a) 51% YoY growth in Intermediates (INR1.7b; 20% of sales), and b) 19% YoY growth in the API segment (INR2.5b; 30% of sales). The Formulations segment (INR4.2b; 50% of sales) grew at moderate rate (11% YoY).

* There was one-time product related loss of INR97.7m in 3QFY21.

* Adjusting for the same, gross margin (GM) expanded 410bp YoY to 54.9%, led by a superior product mix.

* EBITDA margin expanded at a lower rate (300bp YoY) to 26.2% (v/s our estimate of 27%) due to higher opex (employee cost/other expenses up 60bp/48bp YoY as a percentage of sales). EBITDA grew 35.6% YoY to INR2.2b in 3QFY21.

* GRAN’s US subsidiary received a one-time stimulus (INR133m) under the CARES Act. Adjusting for the same, PAT grew 65% YoY to INR1.4b (v/s our estimate of INR1.4b) due to better profitability and lower tax rate.

* For 9MFY21, revenue/EBITDA/adjusted PAT grew by 22%/57%/60% YoY to INR24.4b/INR6.7b/INR4.2b.

Highlights from the management commentary

* The management indicated FY21 earnings growth of 65-70% YoY and is confident of clocking 25-30% YoY growth in FY22.

* It expects steady state GM to be ~52-53% and EBITDA margin of ~27%.

* The company plans to launch ~10 ANDAs over the next 12-15 months (three in 4QFY21).

* R&D spend is expected at be INR850m in FY21. The same is expected to increase to INR1.5b in FY22.

Valuation and view

* We expect 33% earnings CAGR over FY20-23E, led by a 16%/28%/14% sales CAGR in Formulations/PFIs/APIs and 760bp EBITDA margin expansion (in addition to niche products and better capacity utilization).

* The steady off-take of base molecules, coupled with increase in ANDA led business, is expected to improve overall return ratios for GRAN. We continue to value GRAN at 16x 12 months forward earnings to arrive at our TP of INR460/share. Maintain Buy.

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