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Granules’s 1QFY27 EBITDA/PAT were ahead of our estimates (by 7%/11%), primarily on the back of a beat in gross margin. The gross margin (65.6%) beat was aided by a favorable mix, while the quarter’s EBITDA margin outperformance has also come in the face of elevated R&D spend. The company reiterating that the Genome Valley facility will approach 50%+ utilization by end-FY27 (also reflected in the rapid scale-up seen in ex-US markets) and that Senn (peptide CDMO) will be profitable in FY27 were the key positives. The continued increase in the share of complex generics in formulation sales (~50% in 1QFY27 vs ~39% in the base quarter), a key driver of the gross margin outperformance, is largely a consequence of sustained momentum in the company’s controlled substance portfolio. Granules has continued to gain share CYTD in recent launches in the US controlled substance market. Gagillapur clearance in FY27 could pose an upside to our formulation sales estimates (refer to our recent plant visit note), while growth in Senn could turn out to be nonlinear in the medium term (not part of our base case). We expect cumulative FCF generation of ~Rs14bn over FY26-29E (net debt now down to ~Rs1bn) and a PAT CAGR of ~27% over this period. We raise FY27-29 earnings estimates by ~5% and lift our Jun-27 TP by ~6% to Rs950 (vs Rs900 earlier). Retain BUY

EBITDA outperformance driven by gross margin sustaining at elevated levels

Formulation sales grew ~22% yoy, broadly in line with our expectations. The shift in product mix toward complex generics, along with the opening inventory levels in the US, helped sustain gross margin at the record-high levels seen in 4Q despite RM cost pressures. Overall revenue was in line with lower PFI sales offset by a strong uptick in API and peptide CDMO sales. API growth was driven by higher sales from products filed earlier in Europe, while growth in Senn was supported by the commencement of one pharma project and two cosmetics projects during the quarter.

KTAs from the earnings call

1) The company has nine ANDAs pending approval from Gagillapur; approval for nine other products is contingent on IP-related resolution.

2) Senn’s 2HFY27 is expected to be better than 1H, while both 1H and 2H will see yoy growth (expected FY27 revenue of ~Rs2.4bn); the company targets to scale Senn to $50mn in revenue with a 30% EBITDA margin over the next three years.

3) The company has earmarked land for its Indiabased peptide manufacturing facility in Vizag (estimated capex of Rs1bn for peptide intermediates and Rs2bn for peptide API).

4) The company expects to launch 1-2 controlled substance products in FY28 and has a pipeline of 4-5 controlled substance products.

5) Granules expects to launch its first self-developed, backward-integrated oncology product in FY28 across markets; 9-13 oral solid oncology products are in various phases of development, most of which are backward integrated.

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