Mar 28, 2006, 04.11 PM | Source:

Buy Granules for target of Rs 135: Karvy Stock Broking

Broking house, Karvy Stock Broking is bullish on Granules. It has recommended a ‘buy’ rating on the company with a target price of Rs 135.

Broking house, Karvy Stock Broking is bullish on Granules . It has recommended a ‘buy’ rating on the company with a target price of Rs 135.

The Karvy Stock Broking report on Granules:

Moving up the value chain

“Granules has a unique business model that has presence across the pharmaceutical value chain from API to PFI to manufacture of solid dosages, thus servicing the growing outsourcing needs of its customers. Granules pioneered the concept of commercializing the manufacture of Pharceutical Formulation Ingredients, PFIs."

"It possessess the capability to manufacture PFIs in single batch size of 6000 Kgs, thus reducing costs for its customers. It is one of the four global companies in its space to have received regulatory approval for its PFI plant from three regulatory agencies - USFDA, Australian TGA and German Health Authority. The company is forward integrating into finished dosages and dossier fillings and it is backward integrating by creating additional capacities for some strategic APIs.”

Setting up strategic API and tableting capacity

“The company's paracetamol API plant of 8000 TPA (March 2006) and Metformin API plant of 1000 MT (April 2006) will enable higher revenue flows. Setting up the new plant will enable the company to have critical API source to tap the regulated market space for Paracetamol and Metformin segments. Commencement of the 6 billion tableting facility in January 2007 should enable the company to capture the entire value chain and clock higher margins going forward.”

Migration to regulated prescription ANDAs from OTC to aid margin expansion

“Currently the company is selling Paracetamol PFI in the OTC space and is selling Ibuprofen, Metformin and Guaifensin in Latam countries. The company is in the process of increasing its presence in combination OTC segments and shifting to combination prescription products in regulated markets. Increased presence in combination OTC and shift to prescription products would be margin accretive for the company in the medium term.”

Margin expansion over the next two years

“As the company graduates from PFI/API segment and the OTC space to selling more combination products and tablets in the prescription segment, the company would be able to clock higher margins. The company's margin expansion is expected to expand on the back of higher realizations in combination products and prescriptions business which would lead to lower raw materials cost and savings in expenditure.”


“We believe the company's ability to convert existing PFIs in OTC space to prescription ANDAs would pose a challenge. Further direct supply of ANDAs tablets to the companies would be another step in the value addition. Any delay in scale up as anticipated would have a direct impact on the company's revenues and profitability.”

“Increasing trend in negative cash from operations is a worrisome sign. Export revenues which comprise 78% of revenues in FY05, have a credit cycle of 120-180 days. As exports would constitute 90% plus revenues in FY08, working capital requirement would increase on account of debtors. This has been compounded by lower creditor days. The company relies on bank finance as against trade finance and this enables them to get better realisations. As the company gets 100% post shipment finance it does not envisage any liquidity problems.”

Reasonable valuations make the company a Buy

“Increasing volumes in the combination products in the OTC space, shift from OTC space to prescription and ultimately to selling tablet ANDAs will enable the company to move up the entire value chain and clock higher margins going ahead. Higher CAGR revenue growth of 41 % for the next three years and CAGR profit growth of 71% for the next three years would re-rate the company.”

“This will be primarily be driven by new capacity, regulatory approvals and shift to prescription space. Increase in stake by 10% by the promoters at Rs 102 in FY 2007 through convertible warrants enthuse confidence in us. We rate the stock as a Buy with a price target of Rs 135 on the back of 5.6x FY 2007E.”

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