India Equity Institutional Research Pharma RESULT UPDATE Granules India Ltd. INR 113 Misses expectation BUY Result highlights Net sales for the quarter grew by a moderate 8% YoY to INR 3,449mn below our estimates. Auctus Pharma contributed around INR 300mn to sales with a small profit of INR 2mn at PBT level. EBIDTA grew by a healthy 24% YoY to INR 677mn & EBITDA margins stood at 19.6% expanding by 260bps mainly due to operational efficiency in base business and superior product mix. PAT grew by 15% YoY to INR 272mn on account of a higher tax rate at 33%. The Board of directors declared third interim dividend of 15p/share. Expansion of manufacturing facilities to enhance base business growth: During the quarter, around 33% of sales were contributed from FDs, 27% from PFIs & 40% from APIs. FDs and PFIs are high margin business compare to APIs. Company is also expanding Metformin API capacity at Bonthapally to 9000 tonnes from current 2000 tonnes. Management expects Phase 1 of expansion to complete by August 2016. We believe base business growth to improve once the company starts using the benefit of expanded facility. Management has guided sales contribution from FDs will reach 65% at peak level in 5 years time. Company posted sales of around INR 42mn from Abacavir during the quarter. Company is planning to launch additional 4-5 APIs during the year and has filed a multiple sclerosis API with market size of USD 4bn. Going forward we believe company will continue its momentum from the existing and newly commissioned facilities which will lead to top line growth, utilization as well as margin improvement. We expect revenue CAGR of around 15% over FY15-18E & operating margins to be around 19%. Commercialisation from Omnichem JV to drive growth: Company has entered into the high margin CRAMS business through JV (50:50) with Ajinomoto Omnichem. Management has highlighted that the plant has commissioned & guided revenues to be around INR 650-700mn at JV level. Peak sales are expected to be around INR 5,500mn through this JV & operating margins expected to be 20%. We believe this JV will contribute significantly to earnings post FY17. Ramp up in Auctus portfolio basket Auctus pharma contributed around INR 300mn to revenues during the quarter. Granules strategy is to produce API in house and then gradually shift into formulation of same molecule. For this, company will be filing 3-4 ANDAs (including Auctus & Owned) in next 12 months & 10 ANDAs by FY17. Granules is focusing on improving the product mix with more focus on regulated markets which will help operating margins to expand going ahead. We expect strong growth trajectory from turning around of Auctus and expect margins to improve significantly. Valuation: Granules India has achieved a whopping 28% CAGR in revenues & 36% CAGR in earnings over the past 10 years. We expect a healthy earnings momentum to kick-start on account of Granules moving up the value chain towards high margin business, improved capacity utilization & additional product offerings from Auctus Pharma. We expect revenue and earnings CAGR of around 17% and 28% respectively over FY15-18E. Currently the stock is trading at 15x of FY17E & 12x of FY18E EPS. We upgrade our rating to BUY from ACCUMULATE with the target price of INR 160 at 17xFY18E. Key Financials Particulars FY14 FY15 FY16E FY17E FY18E Revenues 10,959 12,929 14,651 17,605 20,747 EBITDA 1,583 2,086 2,725 3,389 4,087 APAT 752 909 1,191 1,542 1,923 AEPS 3.7 4.5 5.8 7.5 9.4 P/E (x) 39.9 33.3 25.4 19.6 15.7 EV/EBITDA (x) 37.9 21.4 16.3 12.5 10.1 RoE (%) 23.9 23.1 24.6 25.3 24.9 Target Price (INR): 160 Potential upside : 42% Market Data Shares outs (mn) 213 EquityCap (INR mn) 213 Mkt Cap (INR mn) 25,678 52 Wk H/L (mn) 164/75 Volume Avg (3m K) 1,329 Face Value (INR) 1 Bloomberg Code Market Info: GRAN IN SENSEX 24,469 NIFTY 7,425 Price Performance Shareholding pattern (%) Particulars Dec15 Sep15 Jun15 Promoters 49.46 48.43 48.47 FIIs 8.51 7.25 2.85 DIIs 1.13 1.02 0.2 Others 40.90 43.3 48.48 Total 100 100 100 Source: BSE Name of Analyst: Hemanshu Srivastava hemanshu.srivastava@krchoksey.com www.krchoksey.com 91-22-6696 5555 91-22-6691 9570 KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ January 29, 2015
Q2FY16 Result Snapshot Profit & Loss account INR mn Q3FY16 Q2FY16 Q3FY15 QoQ (%) YoY (%) Net Sales 3,449 3,664 3,197 (6) 8 Other operating income 0 0 0 0 0 Total Income 3,449 3,664 3,197 (6) 8 Expenditure 2,772 2,975 2,652 (7) 5 Materials Consumed 1,755 2,004 1,762 (12) (0) % of sales 51 55 55 Manufacturing Expenses 272 253 246 8 11 % of sales 8 7 8 Employee Cost 325 312 294 4 11 % of sales 9 9 9 R&D Expenses 34 33 6 4 426 % of sales 1 1 0 Other Exp 386 374 343 3 12 % of sales 11 10 11 EBITDA 677 689 544 (2) 24 EBITDA margin (%) 19.6 18.8 17.0 Depreciation 167 156 136 7 23 EBIT 510 533 409 (4) 25 Other Income 26 16 9 64 195 Interest expenses 114 104 89 10 27 PBT 422 445 328 (5) 29 Tax 151 136 92 11 63 Effective tax rate (%) 36 30 28 17 27 PAT 272 310 236 (12) 15 APAT 272 310 236 (12) 15 Adj. Net Margin (%) 8 8 7 EPS (INR/share) 1.3 1.5 1.2 Quarterly financial Performance Change in Estimates INR mn FY16E FY17E FY18 Old New %Chg Old New %Chg Old New %Chg Revenue 15,131 14,651 (3.2) 18,294 17,605 (3.8) 21,863 20,747 (5.1) EBITDA 2,799 2,725 (2.7) 3,458 3,389 (2.0) 4,132 4,087 (1.1) EBITDA Margin (%) 18.5 18.6 18.9 19.3 18.9 19.7 PAT 1,291 1,191 (7.7) 1,652 1,542 (6.7) 2,048 1,923 (6.1) EPS (INR) 6.3 5.8 (7.7) 8.1 7.5 (6.7) 10.0 9.4 (6.1) 2 KRChoksey - Institutional Research
Quarterly sales trend Quarterly EBITDA and EBITDA margins trend Geography wise quarterly revenue distribution (in %) Vertical wise quarterly revenue breakup (in %) Molecule wise revenue quarterly breakup (in %) Molecule wise revenue yearly breakup (in %) Annual vertical wise production trend 3 KRChoksey - Institutional Research
Geography wise yearly revenue distribution (in %) Vertical wise yearly revenue breakup (in %) Concall highlights: Granules entered into a partnership agreement with Par Pharmaceuticals to market generic version of Merck s Zegerid OTC (Omeprazole and Sodium Carbonate). As per the management, the current market size for the product is USD 40mn, with the expected approval date from the US FDA for the gzegerid to be in July 2016 following patent expiry on July 15, 2016. The management is hopeful of generating revenues in tune of USD 4-5mn from this product. During the quarter, Granules Jeedimetla and Vizag plant were inspected by US FDA. Jeedimetla received 3 observations in Form 483 relating to procedural and standard operating procedures such as complaint registration procedures, equipment cleaning etc. There were no data integrity issues highlighted by the FDA at Granules plant in Jeedimetla. Vizag plant successfully passed US FDA inspection without any Form 483. Management has guided that current growth is sustainable in the future on account of PFI capacity expansion and better product mix which will lead to better operational efficiency. Paracetamol, Metformin, Ibuprofen, Guafenesin, Methacarbonal & others contributed around 38%, 23%, 21%, 6%, 1% & 11% of sales respectively during the quarter. FDs contributed around 33%, PFIs 27%, and APIs 40% of consolidated sales during Q3FY16. Started sales of Ibuprofen Rx in the US markets in September 2015 with sales of INR 150mn from the product during the quarter. The market size for this product stands at around INR 4,000-5,00mn with Dr. Reddy s and Amneal being the only players in the market. Omnichem JV sales for the quarter stood at INR 120mn with margins at ~20% due to some production barrier. Granules has booked sales of ~INR 17mn for this quarter compared to INR 42mn in Q2FY16. The management expects enhanced visibility from its Omnichem JV going forward with sales expected to be in the range of INR 1,500-2,000mn in FY17. Regulated markets contributed 59% with US contributing 34% followed by Europe (19%) and Canada (6%). RoW markets contributed 41% of sales comprising of India (19%), Latam (10%), MENA (11%) and Australia (1%). Auctus posted INR 300mn of sales with a small profit of INR 2mn at PBT level during the quarter. This was aided by portfolio rationalization done by the management for two low margin products. Abacavir reported sales of around INR 42mn during Q3FY16. Overall Biocause JV (50-50) sales stood at INR 670mn for this quarter with INR 43mn in profit during the quarter. Company identified one API in multiple sclerosis space and has made the filing for the same in this quarter. Market size of this drug is estimated at around USD 4bn. The management expects real revenue generation to start from 2019/2020 onwards. Capex for Phase-I Metformin capacity expansion (3600 tonnes) is INR 400-500mn which will be completed by Aug-16. Capex for Phase-II expansion (3400 tonnes) will be INR 200-250 mn will be in FY17. Overall capex for the 9MFY16 stood at INR 770mn with FY16 capex to be around INR 1,000mn. The company has filed for 3 DMFs during the quarter for Guafenesin, Methacarbonal and Metformin. EBITDA margins enhancement during the quarter was led by portfolio rationalization of 2 products from Auctus and oil price decline leading to lower raw material costs with sales being lower due to one of the partner facing formulation issues for its products whose main raw material supply is from Granules, thereby impacting sales. Long term loans stood at INR 3,480mn and working capital loans stood at INR 1,140mn for December 2015. 4 KRChoksey - Institutional Research
Consolidated Financial Statements Income statement INR mn FY14 FY15 FY16E FY17E FY18E Revenues 10,959 12,929 14,651 17,605 20,747 Op. Expenses 9,376 10,843 11,926 14,216 16,660 EBITDA 1,583 2,086 2,725 3,389 4,087 Other Income 43 43 50 58 66 Depreciation 298 527 596 734 822 EBIT 1,328 1,603 2,179 2,713 3,332 Interest 204 323 401 412 462 PBT 1,124 1,280 1,778 2,301 2,870 Tax 371 371 587 759 947 PAT 752 909 1,191 1,542 1,923 Minority 0 0 0 0 0 Sh. of Associates 0 0 0 0 0 Ex. ordinary 0 0 0 0 0 Adj Pat 752 909 1,191 1,542 1,923 Balance Sheet INR mn FY14 FY15 FY16E FY17E FY18E Equity Share Capital 203 204 204 204 204 Reserves & Surplus 3,357 4,107 5,179 6,601 8,405 Total Shareholders Fund 3,560 4,312 5,383 6,806 8,609 Minority Interest 0 0 0 0 0 Non- current liabilities 3,435 3,626 4,165 3,995 3,996 Long term Borrowings 3,092 3,082 3,620 3,450 3,451 Deferred tax liabilities 303 493 493 493 493 Other LT liabilities & provisions 40 52 52 52 52 Current Liabilities 2,925 4,034 3,795 4,248 4,852 Short-term borrowings 1,009 1,250 1,120 1,100 1,101 Trade payables 1,355 1,887 1,876 2,239 2,616 Other cur liabilities & Provisions 561 897 798 910 1,134 Total Liabilities 9,920 11,971 13,343 15,048 17,456 Assets Non- current Assets 6,116 7,024 8,003 9,447 11,200 Fixed assets 6,070 6,786 7,765 9,209 10,962 Non-current investments 2 2 2 2 2 Long-term loans & adv 43 208 208 208 208 Other non-current assets 0 28 28 28 28 Current assets 3,769 4,948 5,340 5,602 6,256 Current investments 0 0 0 0 0 Trade receivables 1,109 1,326 1,525 1,688 1,989 Inventories 1,742 2,245 2,328 2,653 3,126 Cash & bank balances 417 653 908 657 525 Short-term loans & adv 119 47 59 63 75 Other current assets 382 676 520 540 541 Miscellaneous 35 0 0 0 0 Total Assets 9,920 11,971 13,343 15,048 17,456 5 KRChoksey - Institutional Research
Cash Flow Statement INR mn FY14 FY15 FY16E FY17E FY18E PBT 1,124 1,280 1,778 2,301 2,870 Depreciation 298 527 596 734 822 Interest Exp 204 323 401 412 462 Others 2 4 0 0 0 CF before W.cap 1,628 2,133 2,775 3,447 4,153 Inc/dec in W.cap (310) (363) (247) (39) (184) Op CF after W.cap 1,317 1,771 2,528 3,408 3,969 Less Taxes (238) (317) (587) (759) (947) Others 0 0 0 0 0 Net CF From Operations 1,079 1,453 1,942 2,648 3,022 Inc/(dec) in F.A + CWIP (2,649) (1,475) (1,575) (2,177) (2,575) (Pur)/sale of Investments 95 0 0 0 0 Others 8 20 0 0 0 CF from Invst Activities (2,546) (1,456) (1,575) (2,177) (2,575) Loan Raised/(repaid) 1,504 310 8 (602) (460) Equity Raised 11 11 0 0 0 Dividend (47) (83) (119) (119) (119) CF from Fin Activities 1,467 238 (112) (721) (579) Net inc /(Dec) in cash 0 236 255 (251) (133) Op. bal of cash 417 417 653 908 657 Cl. balance of cash 417 653 908 657 525 Ratio Analysis Particulars FY14 FY15 FY16E FY17E FY18E Per share INR EPS 3.7 4.5 5.8 7.5 9.4 CEPS 5.2 7.0 8.8 11.1 13.4 BVPS 17.6 21.1 26.4 33.3 42.1 DPS 0.4 0.6 0.6 0.6 0.6 Payout (%) 11.0 13.5 10.0 7.8 6.2 Valuation (x) P/E 39.9 33.3 25.4 19.6 15.7 P/BV 8.4 7.0 5.6 4.4 3.5 EV/EBITDA 37.9 21.4 16.3 12.5 10.1 Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 Return ratio (%) EBIDTA Margin 14.4 16.1 18.6 19.3 19.7 PAT Margin 6.9 7.0 8.1 8.8 9.3 ROAE 23.9 23.1 24.6 25.3 24.9 ROACE 18.9 18.1 21.4 23.5 25.5 Leverage Ratios (x) Long Term D/E 0.9 0.7 0.7 0.5 0.4 Net Debt/Equity 1.0 0.9 0.7 0.6 0.5 Debt/EBITDA 2.6 2.1 1.7 1.3 1.1 Interest Coverage 6.3 4.8 5.3 6.4 7.1 Current ratio 2.0 1.8 2.0 1.8 1.7 Growth Ratios (%) Income growth 43.4 18.0 13.3 20.2 17.8 EBITDA growth 86.2 31.8 30.6 24.4 20.6 PAT growth 131.0 20.8 31.0 29.4 24.7 Turnover Ratios F.A Turnover x 1.7 1.5 1.5 1.4 1.4 Inventory Days 52 56 57 52 51 Debtors Days 30 34 36 33 32 Payable days 64 79 85 78 79 6 KRChoksey - Institutional Research
Granules India Ltd. Date CMP (Rs) TP (Rs) Recommendation 28-Jan-16 113 160 BUY 02-Nov-15 148 170 ACCUMULATE 14-Oct-15 154 144 HOLD 24-Jul-15 102 112 ACCUMULATE 29-April-15 79 112 BUY 9-April-15 91 114 BUY 29-Jan-15 846 1140 BUY 14-Jul-14 747 1010 BUY Rating Legend Our Rating Upside Buy More than 15% Accumulate 5% - 15% Hold 0 5% Reduce -5% 0 Sell Less than -5% ANALYST CERTIFICATION: I, Hemanshu Srivastava (BE & MBA) research analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. 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