30 July 2014

Granules India - Achieving higher altitude in performance :: Centrum

Rating: Buy; Target Price: Rs860; CMP: Rs626; Upside: 37.4%



Operational efficiency improves



We maintain Buy rating on Granules India (GIL) with a revised target
price of Rs860 (earlier Rs720) based on 12xJune’16E EPS of Rs71.5 due
to strong growth and sustainable margins. GIL’s results for Q1FY15
were in-line with our expectations. The company reported strong
revenue growth of 36%YoY, 400bps improvement in EBIDTA margin to 17.0%
and 56%YoY growth in net profit. The results for the current quarter
include that of Auctus Pharma (APL) acquired in Feb’14. We expect APL
to turn around by the end of FY15. Key risks to our assumptions
include slowdown in the global pharma market and regulatory risks to
its manufacturing facilities.

$ Revenue grows 36%YoY: GIL reported strong revenue growth of 36%YoY
to Rs3.11bn from Rs2.28bn during the quarter. Sales composition was as
follows: finished formulations 38%, PFIs 26% and APIs 36%. However,
the quarterly results were not comparable due to the acquisition of
APL in February’14.  APL reported revenues of Rs261mn, EBIDTA of
Rs22mn (margin 8.4%) and net loss of Rs28mn during the quarter. We
expect APL to turn around by end of FY15 due to moving up the value
chain.

$ Margin improves 400bpsYoY: GIL’s EBIDTA margin during the quarter
grew by 400bpsYoY to 17.0% from 13.0% due to overall decline in costs.
The company’s material cost declined by 180bps to 58.1% from 59.9% due
to the change of product mix and higher capacity utilisation.
Personnel cost declined by 90bpsYoY to 8.3% from 9.2%. Other expenses
declined by 130bps to 16.6% from 17.9%. Going further, we expect
margin improvement due to higher capacity utilisation and change in
product mix with higher sale of formulations.

$ Net profit grows by 56%YoY: GIL’s net profit for the quarter grew by
56%YoY to Rs229mn from Rs147mn due to margin improvement and lower tax
rate. The company’s interest cost grew by 101%YoY to Rs74mn from
Rs37mn due to the increase in working capital and term loan for APL
acquisition. Its depreciation was up to Rs117mn from Rs57mn due to the
Gagillapur facility going on stream and APL depreciation.  GIL’s tax
rate came down to 33.0% from 33.8% of PBT. We expect the company to
report sustainable growth due to moving up the value chain leading to
margin improvement.

$ Recommendation and key risks: At the CMP of Rs626, the stock trades
at 13.6x FY15E EPS of Rs46.1 and 9.5x FY16E EPS of Rs66.2 and 7.2x
FY17E EPS of Rs87.3. We maintain Buy rating with a target price of
Rs860 based on 12x June’16E EPS of Rs71.5 with an upside of 37.4% over
CMP.  We expect the company to deliver superior performance due to the
acquisition of APL leading to the enlargement of product portfolio.
Key risks to our assumptions include slowdown in the global pharma
market and regulatory risks to its manufacturing facilities.



Thanks & Regards
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