Buy Granules India Ltd For Target Rs.475 By Motilal Oswal Financial Services Ltd
In-line 3Q; backward integration projects on track
Net debt declines
* Granules India (GRAN) delivered an in-line performance in 3QFY24. The inferior performance in the API and intermediates (PFI) segments was offset by superior traction in the formulation (FDF) segment. A higher share of FDF boosted profitability on the YoY/QoQ basis. GRAN said backward integration projects for its core products are on track.
* We reduce our earnings estimates by 2%/5%/5% for FY24/FY25/FY26, factoring a) inventory corrections implemented by customers in LATAM, and b) increased competition in Paracetamol in Europe. We continue to value GRAN at 14x 12M forward earnings to arrive at a TP of INR475. We remain positive on GRAN given a) the healthy ANDA pipeline for the US market, b) expanding its presence in manufacturing value chain for its core molecules, and c) a higher share of the FDF business. Maintain BUY.
Product mix benefits partially offset by higher opex
* Sales were stable YoY at INR11.6b (our estimate: INR12.3b), led by a robust performance in the US (led by both existing and new products).
* FDF sales grew 46% YoY to INR7.6b (66% of sales). PFI sales declined 19% YoY to INR1.7b (15% of sales). API sales declined 47% YoY to INR2b (19% of sales).
* Geography-wise, North America sales grew 21% YoY (66% of sales), while Europe/LATAM sales declined 16%/39% YoY to INR2.2b/INR590m (20%/5% of sales) for the quarter.
* Gross margin expanded 860bp YoY to 57% due to a change in the segmental mix and lower RM costs.
* However, EBITDA margin expanded at a lower rate of 150bp YoY to 21.7% (our est: 19.5%), due to higher employee costs and other expenses (up 320bp/390bp YoY as a % of sales).
* EBITDA grew 8% YoY to INR2.5b (our est: INR2.4b) for the quarter.
* Adjusted PAT was almost flat YoY at INR1.3b (our estimate: INR1.3b).
* In 9MFY24, revenue was flat YoY at INR33.3b, while EBITDA/PAT declined 9%/27% YoY to INR6.2b/INR2.9b.
Highlights from the management commentary
* GRAN expects FY24 revenues to be stable on YoY basis. It expects growth to revive FY25 onward.
* The share of core molecules fell to 72% in 3QFY24 from 84% at FY23 end.
* With 4-5 launches in the US for YTD, GRAN expects to launch 3 products in 4QFY24. Particularly, the g-Toprol launch is being delayed as geo-political issues have affected transportation.
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