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Healthy topline growth… Margins expanded

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).

* During Q1FY25, Topline reported a strong growth of 20% (YoY), due to healthy growth in formulations across all geographies.

* EBITDA was reported at Rs.259cr, up by 89% YoY, and EBITDA margin expanded by 810bps YoY to 22%. Resultantly, Adj. PAT was reported at Rs.134.6cr (181% YoY).

* GIL plans to increase R&D spending on CNS, oncology and diabetes segments and aims to backward integrate key molecules.

* Going forward, increasing share of formulations, softening raw material prices, expansion into new geographies, and strengthening key molecules through backward integration are positive in the long term.

* Therefore, we maintain Accumulate rating with a revised target price of Rs.732 based on 23x FY26E EPS

Margins improved on value added product mix

In Q1FY25, topline reported a healthy growth of 20% to Rs.1,179cr. This was due to favourable product mix, which is partly offset by price erosion of paracetamol prices across all geographies due to overstocking of inventories. While revenue in the US grew by 45% YoY to Rs.870cr, it declined by 38% to Rs.149.3cr, in Europe in Q1FY25. However, the company’s EBITDA improved by 89% YoY to Rs.259.3cr, and the EBITDA margin increased by 810bps YoY to 22%, driven by an improved value-added percentage. Thus, the adj. PAT was reported at Rs.134.6cr (an 84% YoY increase). The company’s value added product mix improved, accounting for 58.9% of sales in Q1FY25.

Share of FDs increased YoY

The FD (76% of revenue) grew by 66% to Rs. 891.2cr on increased volumes in all the major geographies. While the API segment contributed 16% to the revenue with a 37% YoY decline to Rs.189cr, the rest of the PFI segment contracted by 33% on pricing pressure and using PFI as raw material for formulations. During the quarter, GIL has received approval from 27 ANDAs in the U.S, with 5 more awaiting approval. The company’s strategic focus is shifting towards the formulation (FD) business and value added products, aiming to increase overall revenue share from 65% to 70% in the coming years. This shift is expected to improve the EBITDA margin going forward. The company is eager to launch 16- 18 products in FY25, with 14 of them being new products. This initiative will enhance future revenue visibility

R&D spending and capacity expansion favours growth

GIL plans to increase R&D spending for the development of complex drugs, particularly in the CNS and oncology, expected to see growth drivers in FY25. Additionally, the company intends to backward integrate some of the key ingredients and launch new products in the oncology segment in FY26E to enhance long-term revenue visibility. In FY25, the company plans to allocate a new capex of Rs.600cr and will pave the way for some of the manufacturing projects in Vizag. The 1st phase of the new formulation facility at Genome Valley is already complete, with 2 billion dosages of FD per year expected during the fiscal year

Outlook and valuation

We remain positive about the company’s long-term profitability and growth prospects owing to new product launches across geographies, a focus on backward integration, and increased market share in existing geographies. However, overstocking of inventories of key drug Paracetamol is likely to soften revenue in the short term. Therefore, we maintain our Accumulate rating, with a target price of Rs.732 based on 23x FY26E EPS.

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