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PFI drives growth, FDF sales stable Work-in-progress to build niche portfolio/resolve regulatory issues

• Granules India (GRAN) delivered in-line revenue/PAT in 1QFY26, though there was a slight miss on EBITDA, largely due to higher operational costs and consolidation of Senn Chemicals during the quarter.
• North America remained the highest growth market for GRAN. It is adding differentiated products to its portfolio – large volume products in CNS/ADHD therapy, controlled substances, peptides, as well as MUPS-based products.
  It has added a healthy number of products to its EU portfolio to revive growth in this segment. Some part of the growth is reflected in 1QFY26 performance.
• We reduce our earnings estimates by 5%/2% for FY26/FY27, factoring in a) increased timeline for approvals from Gagilapur facility, and b) a reduction in sales to ROW markets due to PFI supply backlog. We value GRAN at 18x 12M forward earnings to arrive at a TP of INR530.
• While it is addressing the compliance aspect at Gagilapur site in a comprehensive manner, it is implementing efforts for adding differentiated products to its portfolio to improve growth prospects. The projects are under various stages from product development to adding/modifying commercial manufacturing capabilities/capacities. We expect 14%/19%/24% revenue/EBITDA/PAT CAGR during FY25-27. Maintain BUY.

Segmental mix more than offset by higher opex on YoY basis

• GRAN’s 1QFY26 sales grew 2.6% YoY to INR12b (our est. of INR11.9b), led by increased sales in North America.
• FDF sales were steady YoY at INR9b (74% of sales). Intermediate (PFI) sales grew 20% YoY to INR1.2b (10% of sales). API sales declined 14% YoY to INR1.6b (14% of sales).
• Gross margin (GM) expanded 600bp YoY to 64.9% due to a change in the segmental mix and lower RM costs.
• However, EBITDA margin dipped 160bp YoY to 20.4% (our est. of 21.9%) due to higher employee costs/other expenses (up 290bp/460bp as % of sales) as a result of consolidation with Senn Chemicals AG.
• EBITDA declined 4.8% YoY to INR2.5b (our est. of INR2.6b) for the quarter.
• During the quarter, GRAN incurred a) transaction cost related to the acquisition of Senn Chemicals AG (INR120m) and b) costs related to ongoing litigation.
• Adjusted PAT was flat YoY at INR1.3b (our estimate: INR1.33b).

Highlights from the management commentary

• GRAN expects FY27 to be a much better year for revenue growth vs. FY26.
• The company has acquired a business at EV of INR4.5b, with investment of INR1b in a Swiss facility and INR200-300m in R&D in FY26. FY27 capex will likely be for manufacturing capacity expansion.
• GRAN continues to gradually increase capacity in Europe, with more product approvals expected to improve the growth trajectory.
• Net debt as of 1QFY26 end was INR9.5b, up INR2.5b QoQ. The cash conversion cycle also inched up to 205 in 1QFY26 vs. 202 in 4QFY25.
• Senn Chemicals revenue for 1QFY26 was INR290m.
• GRAN is in early clinical trial stages for most CDMO molecules and is focusing on the execution of ongoing and new projects.

Conference call highlights

• GRAN has six product launches lined up for Europe in the coming quarters. Peptides R&D facility is positioned to be a cost-efficient alternative to China.
• GRAN’s CDMO market opportunity is estimated at INR16-20b. API growth is modest and not a core focus.
• The company spent INR800m on remediation and INR510m on infrastructure and improvement capex related to facility upgrades.
• Its manpower cost rose due to Senn Chem AG acquisition; expected to stabilize. ROCE dipped to 16% due to the acquisition and a long gestation period.
• GRAN targets full peptide ramp-up by 1QFY27 and is also setting up R&D facilities in India for cosmetic industry applications.

Broader portfolio, peptide expansion, and strong compliance

initiatives to drive revival

Boost the non-legacy mix and scale up development work on peptides

• GRAN has implemented efforts to diversify its offerings, with non-legacy portfolio share increasing to ~38% in the past 12 months from 16% in FY23.
• Specifically, the FDF share in 1QFY26 revenue was 74%, driven by the addition of large-volume products in CNS/ADHD therapies and expanding OTC presence.
• GRAN has also expanded its work on controlled substances and MUPS-based products to further reduce the concentration of legacy products.
• GRAN is also working on new technology-based products. Specifically, GRAN’s team developed a product using in-house enzyme, which has been successfully scaled up and validated.
• Notably, it has fast-tracked its business scope in the peptide space through the acquisition of Senn Chemicals. Its six-decade legacy in solid-phase and liquid phase peptide synthesis and its relationship with innovators should scale up GRAN’s prospects in peptide space.
• With expanding offerings and enhancing manufacturing capacity, we expect 15% sales CAGR in FDF segment over FY25-27.

Compliance progress and global pipeline to aid growth revival

• After filing 85 products for the US market till FY25, GRAN’s cumulative filing remained stable in 1QFY26.
• While GRAN has implemented comprehensive compliance measures at Gagillapur site to resolve a warning letter, the product development work continues to build a potential pipeline.
• In addition, it has a GPI facility in US with products filed and awaiting approvals. These products are in CNS/ADHD therapies. Notably, the GPI R&D (US) supports GRAN on complex finished dosage development.
• The pace of filing has increased in Europe with cumulative 18 filings to date. While EU sales witnessed significant deceleration in FY25, GRAN is reviving sales of this segment through new launches as partly reflected in 1QFY26 performance. Reiterate BUY
• We reduce our earnings estimates by 5%/2% for FY26/FY27, factoring in a) increased timeline for approvals from Gagilapur facility, and b) a reduction in sales to ROW markets due to PFI supply backlog. We value GRAN at 18x 12M forward earnings to arrive at a TP of INR530.
• While it is addressing the compliance aspect at Gagilapur site in a comprehensive manner, it is implementing efforts for adding differentiated products to its portfolio to improve growth prospects. The projects are under various stages, from product development to adding/modifying commercial manufacturing capabilities/capacities. We expect a CAGR of 14%/19%/24% in revenue/EBITDA/PAT during FY25-27. Maintain BUY.

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