Buy Granules India Ltd. For Target Rs. 465 - Motilal Oswal Financial Services
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Strong show in formulations
API/PFI continue to drag overall performance
* Granules India (GRAN) delivered in-line operational performance for the quarter. The earnings were below estimate due to higher-than-expected interest/tax. GRAN ended FY24 with a 19.5% YoY decline in earnings, attributed to an IT incident and a significant decrease in paracetamol demand.
* We maintain our estimates for FY25/FY26. We value GRAN at 15x 12M forward earnings to arrive at a price target of INR465. With new launches in regulated markets (US/EU) comprising niche products such as Metoprolol, better offtake of Ibuprofen, and a low base of FY24, we expect strong recovery in earnings over FY24-26. The prolonged timeline for inventory normalization related to paracetamol would partly offset the business recovery.
* We remain positive on GRAN on the back of a) robust pace of product introduction in focus market, b) backward integration for its key molecules and c) attractive valuation. We maintain our BUY recommendation on the stock.
Segment mix benefit offset by higher other expenses
* GRAN sales declined 1.6% YoY to INR11.8b (our est: INR12.2b). Robust performance in the US was offset by weak show in the EU/LATAM/India/ROW market. Intermediates (PFI) sales declined 32% YoY to INR1.5b (13% of sales). API sales declined 55% YoY to INR1.6b (14% of sales). Formulation (FDF) sales grew 41% YoY to INR8.6b (73% of sales).
* Gross Margin (GM) expanded 12.2 percentage points YoY to 60.1%, due to change in segmental mix and lower RM cost.
* However, EBITDA margin expanded at a lower rate of 200bp YoY to 21.7% (our est: 19.5%), due to higher employee cost and other expenses (up 230bp/790bp YoY as a % of sales). Other expense was higher due to increased R&D expenditure and Freight cost.
* EBITDA grew 8% YoY to INR2b (in line) for the quarter.
* Adjusted PAT grew at 3.4% YoY to INR1.3b (our estimate: INR1.4b).
* In FY24, revenue was flat YoY at INR45b, while EBITDA/PAT declined 5%/20% YoY to INR7.8b/INR4.2b.
Highlights from the management commentary
* GRAN indicated GM to be in the range of 55-58% for FY25. GNP guided for EBITDA margin to be 22-23% for FY25.
* GRAN indicated 16-18 launches in US/EU in FY25, out of which, ~14 would be new to the market.
* g-Metoprolol and Ibuprofen would be among the key drivers of growth in revenue for FY25.
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