Investment Idea - Buy Granules India Ltd For Target Rs.300 - Motilal Oswal
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Profitability revives sequentially; upgrade to BUY
Multiple factors at play to improve business prospects going forward
* Granules India (GRAN) delivered better-than-expected 4QFY22 performance at operational level. Better realization from paracetamol supported by new launches resulted in improved profitability on a QoQ basis.
* We cut our EPS estimates by 3%/5% for FY23E/FY24E to factor in: a) increased price erosion in the base portfolio, b) opex towards MUPS/oncology block and c) higher freight cost. We value GRAN at 12x 12M forward earnings to arrive at our TP of INR300.
* We upgrade the stock to BUY as we expect multiple leverssuch as: a) reducing impact of paracetamol’sraw material (RM) prices, b) healthy launches in developed markets such as the US/EU, c) steady market share gain in core molecules across global markets and d) improving business prospects from MUPS/ Oncology blocks, to play out over the next 2-3 years. Further, the stock is attractively valued at 12x FY23E EPS of INR20.5 and 10x FY24E EPS of INR24.5.
RM cost and higher opex impair margins on a YoY basis
* GRAN’s sales grew 29% YoY to INR10.3b (est. INR10.5b), driven by Intermediates (PFIs; up 78.3% YoY to INR2.6b) and APIs (up 27.7% YoY to INR2.5b). Formulation (FDF) sales grew 14% YoY INR5.3b for the quarter.
* Gross margin contracted ~830bp YoY to 48.9% due to higher RM prices, particularly related to paracetamol.
* EBITDA margin contracted at a slightly lower rate of 660bp YoY to 18.7% (est. 17.2%). Higher RM cost was partially offset by lower employee expenses (-200bp YoY as a percentage of sales).
* EBITDA decreased 4.6% YoY to INR1.9b (est. INR1.8b) in 4QFY22.
* PAT declined 13% YoY to INR1.1b (in line), due to a higher tax rate.
* In FY22, sales grew 15.8% YoY to INR37.4b, while EBITDA/PAT declined 19%/27.5% YoY to INR7b/INR4b, respectively.
Highlights from the management commentary
* The major Chinese supplier is expected to restart supply of key RM for paracetamol from Jun’22 onwards.
* GRAN has a target to launch 10-12 ANDAs in the US market and about five products in the EU market in FY23E.
* GRAN is also developing a process to manufacture Para-amino Phenol (PAP) in-house to reduce the external dependency.
* Management indicated about two launches from Oncology block in FY23E.
* GRAN is expected to maintain net debt of INR7b in FY23.
* Management guided for a capex of INR6b over the next two years.
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