MOSL: GRANULES INDIA (Buy)-Story unfolding on expected lines-Vizag-based facility under JV with Omnichem receives EIR

​GRANULES INDIA: Story unfolding on expected lines; Vizag-based facility under JV with Omnichem receives EIR

(GRAN IN, Mkt Cap USD0.5b, CMP INR122, TP INR200, 64% Upside, Buy)

• Granules India's (GRAN) Vizag facility was inspected by the US FDA in Dec-16, post which it was issued seven 483 observations. This is a new facility, and currently the JV is manufacturing pre-APIs from this facility. EIR will clear the road for the JV to reach out to innovators to supply APIs. We expect GRAN to make APIs in 2HFY19E from this plant (~12-15 months will be required for making exhibit batches and site transfers). This would lead to margin inflection (from ~21% now to ~30% by 2HFY19E).
  
• Granules-Omnichem JV - a potential cash cow: 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. It will also provide full support for quality, engineering, tech transfer, procurement, sales and management-related matters. FY17 was the first full year of operation for this JV. This JV manufactures pre-APIs of four products. Sales stood at ~INR2b in FY17, with EBITDA margin of ~22% and PAT margin of ~12%. We expect this JV to record revenue of ~INR4.5b, with EBITDA margin of>30% in FY20E.
  
• Base business - augmented capacity to fuel growth; focus on formulations to boost margins: Currently, API is running at 100% capacity and PFI at 75-80% utilization. The company had planned to increase its API capacity by ~40% and PFI capacity by >20% (expansion plan to get over in FY18), which will help fuel growth in formulations (as GRAN is dependent on backward integration). This will help grow the base business at mid-to-high teens until at least FY20 (~27% CAGR over FY17-20E v/s ~7% in FY17).