HDFC Securities is bullish on Granules India has recommended buy rating on the stock with a target price of Rs 170 in its research report dated August 01, 2019.
HDFC Securities' research report on Granules India
Revenue growth of 31% YoY was driven by new launches, market share gains, and utilization of expanded facilities in the formulations segment. The sequential dip of 3% was on account of lower API sales in India and ROW, intentionally subdued to protect profitability. The business mix improved with 72% of revenue coming from US & EU (v/s 61% YoY). Formulations revenue grew 58% YoY to Rs 2.86bn with expanded facilities and traction gained in high-volume products like Paracetamol and Metformin. Growth in API revenues was slower at 18% YoY to Rs 2.14bn owing to delayed approvals from expanded API capacities. PFI sales at Rs 952mn grew 5% YoY. Gross margin improved 490/450bps YoY/QoQ to 50.4% led by improved mix within formulations (higher no. of front-end products), and ramp up in US sales. GM is sustainable at current levels owing to stable raw material prices, better mix, higher US/EU contribution, and backward integration in place for most products. EBITDA margin at 19.9% was up 390/400bps YoY/QoQ. PAT stood at Rs 832mn, up 61/30% YoY/QoQ. Profits from JVs at Rs 255mn grew 74/34% YoY/QoQ and led to the beat of 23% to our estimates. Profits from JVs will be subdued over the remainder of FY20 due to: (1) Biocause plant shutdown, and (2) lower than anticipated offtake in Omnichem. Net debt reduced by Rs 450mn to Rs 8.63bn QoQ. FCF was at Rs 600mn for the quarter. Promoter pledge (43% of holding) will reduce by 7-10% in a few days.
We maintain BUY on Granules following yet another quarter of robust YoY growth driven by expanded capacities. EBITDA margin at 19.9% was 300bps above estimates, despite a 5% miss on revenue. Our TP is unchanged at Rs 170 (12x FY21E EPS).
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