MOSL: GRANULES INDIA (Buy)-Increased operating leverage to drive profitability

Granules India: Increased operating leverage to drive profitability

(GRAN IN,Mkt Cap USD0.3b, CMP INR93, TP INR130, 40% Upside, Buy)

• Revenue growth, and higher income from JVs and other sources drive profitability: GRAN’s 1QFY19 sales grew 17% YoY to INR4.5b (our estimate was INR4.8b), led by finished dosages and APIs. Gross margin declined from 53% in 1QFY18 to ~45% primarily due to increase in raw material prices. However, GRAN has been able to pass on the raw material price hike to customers and there has been some cooling off QoQ; hence, gross margin has improved sequentially. EBITDA declined ~14% YoY to INR726m (our estimate was INR772m). EBITDA margin declined ~580bp YoY to 16%; the decline in EBITDA margin was lower than the decline in gross margin due to lower other expenses. Though EBITDA declined, PAT grew ~41% YoY to INR518m, mainly due to sharp rise in income from JVs (INR146m in 1QFY19 v/s INR160m in FY18) and higher other income (includes forex gain of INR110m). Decreased supply of ibuprofen by a competitor increased sales and profitability of Biocause JV, and resumption of shipments by a customer improved business for Omnichem JV.
• Incremental formulations revenue, stable operating cost to improve margins: Finished dosage (40% of sales) and API (40% of sales) businesses grew 20% and 27% YoY, respectively, driving 17% YoY growth in revenue. Incremental business in US market from approved ANDAs and increased supply from enhanced capacity should drive revenue growth, going forward. Better availability of raw material and stable operating cost would help increase operating leverage, and thus, improve profitability.