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Robust revenues across major markets

Granules India Ltd. (Inc.) is a vertically integrated, high growth pharmaceutical company headquartered in Hyderabad, India. The company manufactures Active Pharmaceutical Ingredients (API), Pharmaceutical Formulation Intermediates (PFI) and Finished Dosages (FD).

* Driven by higher sales in the USA and Europe, FY23 revenue grew by 20% YoY to Rs. 4,512 cr, despite the continued price erosion in the US market.

* EBITDA climbed 27% YoY to Rs.914 cr, owing mostly to increased business across all major markets. EBITDA margin expanded by 110 bps to 20.3%.

* Resultantly, Adj PAT was recorded at Rs.517 cr (+25% YoY). Operating cash flow improved from Rs. 332 cr in FY22 to Rs. 739 cr in FY23.

* Growth was recorded across all segments, with FD (17%), APIs (38%) and PFIs (7%). The share of APIs in the revenue mix increased from 26% to 30% YoY.

* Going forward, softening raw material prices, expansion into new geographies, and strengthening of key molecules through backward integration are positives for the company.

* Hence, we upgrade our rating to BUY on the stock with a target price of Rs. 342 based on 12x FY25E EPS.

Growth across all segments

Revenue for FY23 grew by 20% YoY to Rs. 4,512 cr, led by increased sales in USA and European markets. The sales in the USA (53% of sales mix) grew by 30% YoY to Rs.2,378 cr and Europe (23% of sales mix) by 29% to Rs.1,021 cr. This was despite the continued price erosion in the US markets and the problems in distribution due to 3PL providers, which cause missed shipments, resulting in revenue loss and supply penalties. EBITDA was reported at Rs. 914cr, up 27% YoY, with EBITDA margin expanding by 110bps YoY to 20.3%. Adj PAT was reported at Rs.517 cr (+25% YoY). The molecules paracetamol (46% of sales mix) grew 44% YoY, Metformin (22% of mix) grew 6% YoY, while Ibuprofen (10% of sales) declined 8% YoY.

Share of APIs increased YoY

API grew 38% YoY to Rs. 1,341 cr to contribute 30% of revenue, while the FD (50% of revenue) grew by 17% to Rs. 2,268 cr and the PFI (20% of revenue) segment grew by 7% to Rs. 902 cr. During FY23, GIL filed 7 DMFs,6 ANDAs, 5 CEPs and other dossiers across Europe and the rest of the world. They also expand the market for paracetamol and metformin formulations to new European countries and endeavour to achieve a 50% market share in paracetamol

Capacity expansion and green chemistry for growth

A new packaging facility in Virginia, USA, was partially commercialized and received FDA approval, and the management is expecting that this will help to improve working capital and reduce uncertainty in sales. GIL is partnering with Greenko to establish an integrated green pharmaceutical zone and has formed a fully owned subsidiary, Granules CZRO. The initial objective of this is to strengthen the key molecules Paracetamol and Metformin with a near-zero carbon footprint. The expected capex for this initiative is Rs 2,000 cr over the next 5 years. Construction of the new formulation facility at Genome Valley is progressing at a good pace, and we expect phase 1 to be completed by October 2023 and phase 2 by May 2024

Outlook and valuation

We remain optimistic about the company’s long-term profitability and growth prospects owing to new launches, a focus on backward integration, and increased market share in existing geographies. Hence, we upgrade our rating to BUY with a target price of Rs. 342 based on 12x FY25E EPS.

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