MOSL: GRANULES INDIA (Buy)-Gearing up for next phase of growth-JV to be under pressure, but long-term prospects intact

​GRANULES INDIA: Gearing up for next phase of growth; JV to be under pressure, but long-term prospects intact

(GRAN IN, Mkt Cap USD0.4b, CMP INR124, TP INR200, 61% Upside, Buy)

• We recently hosted the management of Granules India (GRAN) at our Midcap Conference. We surmise that the JV business will be impacted in the near term due to deferral of sales by a key client, though the company maintains its medium-term revenue growth guidance (of 20-25% CAGR) from Omnichem JV. GRAN plans key filings (4-6 ANDAs) in 1HCY18 in the US. The impact of ramp-up in production in traditional business will be visible over the next 12-18 months.
  
• GRAN-Omnichem JV – near-term hiccups; medium-term guidance maintained
  
• This is a 50:50 JV between GRAN and Ajinomoto’s subsidiary, Omnichem. Omnichem would be transferring large-scale production of intermediates and APIs to the JV. Procurement from one of the key client has got deferred by two years, due to which sales growth in the near term will get impacted. The company maintains its 5-year revenue growth guidance (of 20-25% CAGR) through the Omnichem JV.
  
• Base business – augmented capacity to fuel growth; focus on formulations to boost margins
  
• Currently, API capacity is running at 100% utilization and PFI capacity at 75-80% utilization. GRAN had planned to increase its API capacity by ~40% and PFI capacity by >20% (expansion plan to get over in FY18), 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 (~27% CAGR over FY17-20E v/s ~7% in FY17).