MOSL: GRANULES INDIA (Buy)-Combination of strong growth and multiple re-rating

​GRANULES INDIA: Combination of strong growth and multiple re-rating

(GRAN IN, Mkt Cap USD0.5b, CMP INR149, TP INR200, 34% Upside, Buy)

From being one of the largest Paracetamol API manufacturers for regulated markets, Granules India (GRAN) has now ventured into CRAMS and US Rx business, where it can leverage its competitive advantage of being a high-quality, low-cost producer. Despite delivering ~40% PAT CAGR over last five years, we expect GRAN to deliver ~35% PAT CAGR till FY20E. This will be led by (1) capacity expansion in the base business, 2) doubling of revenues (INR2.3b in FY20E from INR1.0b in FY17) and expansion in EBITDA margin (>30% in FY20E from ~21% in FY17) in Omnichem CRAMS JV, and 3) new US generic business sales of ~USD85m in FY20 v/s nil currently.

Base business – augmented capacity to fuel growth; focus on formulations to boost margins

• GRAN is among the largest manufacturers of Paracetamol and Ibuprofen APIs for the regulated markets. Along with this, it has been supplying Metformin, Guaifenesin and Methacarbamol API/PFI/formulations. Until FY17, ~85% of its business has come from these five base molecules. A higher focus on formulations over past 4-5 years (revenue contribution up >10%) has helped GRAN expand its EBITDA margin from 11% in FY13 to ~21% in FY17.
• Currently, API is running at 100% capacity and PFI at 73% utilization. The company had planned to increase its API capacity by ~40% and PFI capacity by >20% by March 2017, which will also help fuel growth in formulations (as the company is dependent on backward integration). This will help grow the base business at mid-to-high teens till at least FY20 (~16% CAGR over FY17-20E v/s ~7% in FY17).