Granules India: Revenues Flat, Net Declines

Granules India, a Hyderabad-based pharma company, has disappointed the streets with a 5% topline growth to Rs 195 crore. In an exclusive talk with us, Harsha Chigurupati, Executive Director at Granules India said that the slower growth during the quarter is due to the delay in capacity expansion. The company is in the process of setting up new Finished Dosage (FD) facilities with state-of-the-art technology which got delayed. Harsha Chigurupati, however, remains upbeat on Granules' focus on its FD and PFIs (Pharmaceutical formulation ingredients) segments. “The new facilities will be commissioned in the first quarter of the next fiscal” he said in a conference call with us.

The quarter has seen its net profit dropping by 27% to Rs 5.80 crore on a YoY basis. EBITDA margins too fell sharply on a YoY and sequential basis to 9.46%. Granules has already started addition of employees for the new capacities which has increased its employee costs. Besides, higher fuel costs have also put margins under pressure. VVS Murthy, CFO, Granules India said that the company has seen the prices of merchant power going up resulting in increased input costs. He also said that generating own electricity using diesel is not a viable option as the recent hike to the tune of Rs 10 per litre for the bulk consumers would increase the fuel costs to about Rs 18 per unit against Rs 5-7 per unit for the electricity sourced through open access electricity. Murthy also said that the company would keep purchasing the open access electricity going ahead and expect the margins in the Q4 to remain at the current level after which they will start improving in the June quarter of FY14.

Granules has reported its R&D expenses to have increased by 60% during the quarter. Chigurupati said that the company is developing a couple of products in the R&D center. He, however, declined to comment on this. He also said that there is no major hurdle in the capacity addition and after the initial delay the company will commission the capacities in the first quarter.

The high growth that it had reported in the last year will again be seen once the capacity addition is completed. Also, the FD products are well in demand and have higher EBITDA margins than the other two segments due to which the revenues and EBITDA will also rise. All in all, both Murthy and Chigurupati expect the next year to be better than FY13.

The stock had seen a sharp run up on the bourses in the last year. Lately the stock has corrected sharply. As soon as the result was announced, the stock tanked by 12.6% at closing of trade today (Jan 24, 2012). The stock at the CMP of Rs 138 is trading at the PE multiple of 7.63x. Based on the current financials, we estimate that the current price of scrip should be Rs 130 and hence we may see a further correction in the stock hence one should wait before buying the scrip. Nevertheless, the next two quarters would be crucial for the company as it will go for capacity addition. That is when we will re-look at the valuations and advice our readers whether to buy the scrip or not.