Recommendation from Pharmaceuticals & Drugs Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year. 

GRANULES INDIA A STRONG GLOBAL FOOTPRINT

HERE IS WHY
✓Product expertise
✓Expanding global presence
✓Increase in revenue

Just as the world was getting back on its feet after the pandemic-driven lockdowns and the Russia– Ukraine war, it is once again gripped by fears of the fourth corona virus wave. The emerging situation, however, spells an opportunity for the Indian pharmaceutical sector which has gained expertise in ‘first line of defence’ products such as Paracetamol. One such leading company is this segment is Granules India Ltd. which would be able to benefit from the current scenario and also take advantage in the long run through its bulk production facility and economies of scale.

Granules India is engaged in the business of manufacturing pharmaceutical products. The company manufactures active pharmaceutical ingredients (APIs), pharmaceutical formulation intermediaries (PFIs) and finished dosages (FDs). It has a strong presence in Paracetamol, Ibuprofen, Guaifenesin and Metformin. The company exports nearly 60 per cent of its revenue to the US and Europe. In Q3FY23 the company launched a European formulation of Paracetamol which is likely to increase sales in Europe and other regions. In Q1FY23, about 53.8 per cent of the revenue came from the US,which increased to 57.8 per cent in Q2FY23.

This was due to higher sales of Paracetamol to its marquee customers and it is very likely that they will continue with Granules India. The company operates in more than 80 countries with 52 per cent of revenue share coming from North America, 21 per cent from Europe, 10 per cent from Latin America, 12 per cent from India and the remaining from the rest of the world. The company has seven manufacturing units, six in Indiaand one in the US. The company has built one of the largest PFI, world’s largest Paracetamol API facility and single site FD facilities in the world.

It has two state-of-the-art research and development centres in Hyderabad and Virginia. In Q2FY23, 51 per cent of its revenue share came from finished dosages which was 57 per cent in Q1FY23 while 29 per cent revenue came from APIs which was 21 per cent in Q1FY23. Up to 20 per cent revenue came from the pharmaceutical formulation intermediaries. The sales of the company have been growing at a three-year CAGR of 18 per cent. It delivered an operating profit margin of 21.1 per cent in Q2FY23. In FY22, the company delivered an operating profit margin of 19.3 per cent. The net profit margin was 11 per cent in FY22 and 12.6 per cent in Q2FY23. The company delivered strong results in Q2FY23, with an increase of 30 per cent in revenue on YoY basis which stood at ₹1,151 crore while on QoQ basis it increased by 13 per cent. 

The operating profit of the company stood at ₹243 crore which increased 61 per cent in YoY basis and 15 per cent QoQ basis. The company had net debt of ₹553 crore in Q2FY23 which was ₹613 crore in Q1FY23. The company generated ₹124 crore of free cash flow in Q2FY23. The stock of the company is currently trading at a TTM PE of 16.35 times, which looks attractive given its growth prospects. The company’s return of equity and return on capital employed are at 16.55 per cent and 16.29 per cent, respectively. It is expected that Granules India will deliver strong results in the current quarter due to downward trend of raw materials, price stability of the company’s products and freight cost coming down. It has strong demand for its products and business outlook and so we recommend BUY.