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2Q in-line; gradually ramping supply from the Gagillapur facility

Outlook slowly improving for the PFI/API segment

*  Granules India (GRAN) delivered in-line 2QFY25 performance. The proactive measures taken to address issues highlighted in the recent USFDA inspection led to a temporary shutdown of the Gagillapur facility. This resulted in a deterioration in revenue/EBITDA/PAT in 2QFY25 on a YoY as well as QoQ basis.

*  We lower our earnings estimate slightly by 3% for FY25/FY26/FY27 to factor in: a) the prolonged adverse impact of higher inventory of paracetamol at the industry level and b) the gradual scale-up of the Gagillapur facility.

*  We value GRAN at 20x 12M forward earnings to arrive at a TP of INR680.

*  GRAN continues to work toward building a pipeline comprising CNS/ADHD products, MUPS-based products, oncology products, liquids, and nasal sprays. This would not only further diversify the portfolio from legacy products but also drive better profitability of the overall business. Accordingly, we expect a 29% earnings CAGR over FY25-27. Reiterate BUY.

Product/segmental mix benefit partly offset by lower operating leverage

*  Granules sales declined 18.7% YoY to INR9.7b (in-line), led by the voluntary pause at the Gagillapur facility due to the US FDA inspection. Formulation (FDF) sales grew 2% YoY to INR7.5b (78% of sales). Intermediates (PFI) sales declined 47% YoY basis to INR756m (8% of sales). API sales declined 52% YoY to INR1.4b (15% of sales).

*  Gross Margin (GM) expanded 10.4% YoY to 62% due to a change in the segmental mix and lower RM cost.

*  However, EBITDA margin expanded 310bp YoY to 21% (our est: 20.6%), due to improved gross margins that were partly offset by higher employee expense/other expense (up 400bp/330bps as a % of sales).

*  EBITDA declined 4.5% YoY to INR2b (in-line) for the quarter.

*  Adjusted PAT declined 4.8% YoY to INR972m (our estimate: INR933m).

*  In 1HFY25, revenue declined 1% to INR21.5b while EBITDA/PAT grew 24.7%/40.2% YoY to INR4.6b/INR2.3b.

Highlights from the management commentary

*  GRAN has resumed dispatches from the Gagillapur facility from Oct’24 onwards.

*   It engages with third-party consultants/experts to review and resolve issues related to cross-contamination, data management, and investigational studies. GRAN expects EIR in Dec’23.

*  The cash-to-cash cycle increased from 30 days in 2QFY25 to 213 days due to new launches, Red Sea issues, and USFDA issues at Gagillapur.

*  GRAN has witnessed some easing of inventory levels related to paracetamol and expects normalcy in the PFI/API business from 4QFY25 onwards.

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