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Operational headwinds to normalize

Granules India Ltd. (Inc.) is a vertically integrated, high growth pharmaceutical company headquartered in Hyderabad, India. The company manufactures Active Pharmaceutical Ingredients (API), Pharmaceutical Formulation Intermediates (PFI) and Finished Dosages (FD).

* During H2FY24, topline reported flat growth to Rs.2,175cr, due to price erosion in European markets and the continued impact of cybersecurity issues.

* EBITDA was reported at Rs.350cr, down by 23% YoY, and EBITDA margin declined by 485bps YoY to 16%. Resultantly, Adj. PAT was reported at Rs.150cr (-45% YoY), due to higher interest charges.

* Going forward, softening raw material prices, expansion into new geographies, and strengthening of key molecules through backward integration are positive in the long term.

* However, delayed launches of some of the molecules are likely to impact revenue. • Therefore, we downgrade our rating to Accumulate with a target price of Rs. 464 based on 16x FY26E EPS.

Continued operational headwinds trimmed top line growth

In H2FY24, topline reported flat growth to Rs.2,175cr. Revenue in the US grew by 11% YoY to Rs.799cr, while in Europe it declined by 8% to Rs.213cr, in Q2FY24. This was due to price erosion in the European markets and the continued impact of cybersecurity issues faced in the first quarter. EBITDA was reported at Rs.350cr, down by 23% YoY, and EBITDA margin declined by 485bps YoY to 16%. Adj. PAT was reported at Rs.150cr (-45% YoY), due to higher interest charges.

Share of FDs increased YoY

The FD (62% of revenue) grew by 27% to Rs. 742cr on increased volumes in U.S. markets. While the API segment contributed 25% to the revenue with a 9% YoY decline to Rs. 302 cr., the rest of the PFI segment contracted by 38%. During the quarter, GIL has received approval from 59 ANDAs, with 10 more awaiting approval in the US. They planned to launch 7 products in the U.S. and 2 each in the UK, South Africa, and Europe in H2FY24. However, due to operational headwinds, margins squeezed in H1FY24, which is expected to normalize during H2FY24.

Capacity expansion and green chemistry for growth

A new packaging facility in Virginia, USA, was commissioned and is now fully operational. The management is expecting that this will help to improve working capital and reduce uncertainty in sales. GIL is partnering with Greenko to establish an integrated green pharmaceutical zone and has formed a fully owned subsidiary, Granules CZRO. The initial objective of this is to strengthen the key molecules, paracetamol and metformin, with a near-zero carbon footprint. The expected capex for this initiative is Rs 2,000cr over the next 5 years. Construction of the new formulation facility at Genome Valley is progressing at a good pace, with the first phase and next phase expected to be completed by May 2024, adding 2.5 billion dosages per year.

Outlook and valuation

We remain optimistic about the company’s long-term profitability and growth prospects owing to new product launches, a focus on backward integration, and increased market share in existing geographies. However, delayed launches of some of the molecules are likely to impact revenue. Therefore, we downgrade our rating to Accumulate with a target price of Rs. 464 based on 16x FY26E EPS.

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