13 August 2016
1QFY17 Results Update | Sector: Healthcare
Granules India
BSE SENSEX
28,152
S&P CNX
8,672
CMP: INR135
TP: INR160 (+19%)
Buy
Motilal Oswal values your support in
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Results largely in line; margins remained robust
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
GRAN IN
216.7
29.3 / 0.4
164 / 101
-10/4/27
218
48.9
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Sales
14.3
15.6
19.0
EBITDA
2.8
3.2
4.0
NP
1.2
1.6
2.2
EPS (INR)
5.5
6.8
9.8
EPS Gr. (%)
22.8
25.1
42.6
BV/Sh. (INR)
30.7
39.6
47.5
RoE (%)
21.6
19.9
22.4
RoCE (%)
14.0
14.1
16.4
P/E (x)
24.6
19.7
13.8
P/BV (x)
4.4
3.4
2.8
Estimate change
TP change
Rating change
As per Ind-AS, revenues grew 7%YoY to INR3.4b (largely in line) led by sustained
traction in CMO and Rx business. However, EBITDA increased 11% YoY to INR692m
on the back of improved business mix in 1QFY17. EBITDA margins expanded 72bps
YoY, to 20.1% primarily owing to higher gross margins (up 280 bps YoY). PAT grew
37% YoY to INR390m (+9% beat). JV business (Biocause and Omnichem delivered
robust profits of INR71m in 1QFY17.
Finished dosage continues to shine:
Finished dosage segment grew 31%YoY
to ~INR1.2b, driven by scale up in Rx business. PFI segment declined by 13%
YoY and API segment grew at a modest pace of 4.4% YoY to INR1.4b. The
company has been witnessing pricing pressure within the Paracetamol
molecule that has resulted in muted API sales. The company maintained its
consolidated top-line growth of ~15-16% YoY in FY17. Company expects to
launch 1
st
ANDA product from US Pharma acquisition (gLatuda) in 4Q FY18.
Over FY16-18E, we expect GRAN’s revenues to grow at 18% CAGR (adjusted for
JV sales), driven by strong growth in Finished dosages segment.
Margins remained robust on the back of favorable business mix:
EBITDA
margin at 20.1% (up 72bp YoY) was boosted by higher contribution from
finished dosages segment during this quarter (~36% of sales vs 29% in 1Q
FY16). Moreover, The company is also working on improving manufacturing
efficiency that resulted in better yield for some of the key products. We expect
EBITDA margins to expand by 240bp over FY16-18E led by improving business
mix and better operating leverage. Hence, EBITDA is likely to outpace revenue
growth at 21% CAGR over FY16-18E.
Earnings acceleration to drive valuation upside:
We expect GRAN to
report 34% PAT CAGR over FY16-18E, driven by improving traction in finished
dosages formulations. However, the story beyond FY18 is much rosier, as we
see more approvals in the US for the OTC and Rx business and ramp-up is
expected in Omnichem JV, which will drive both revenue and profitability. At
CMP stock trades at 20x FY17E and 14x FY18E EPS. We re-iterate
Buy
with
target price of INR160 (@16x FY18E EPS).
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Gaurav Tinani
(Gaurav.Tinani@motilaloswal.com); +91 22 6129 1552
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Granules India
At a strategic inflection point
US OTC and Rx business to transform business model
On the back of US OTC sales and ramp-up in existing Rx sales (through new
product launches), we project 35%+ revenue CAGR in GRAN's formulations
business over FY16-20E.
Currently, GRAN has five products approvals in the US (2 Rx and 3 OTC). It is
likely to file 10 more ANDAs over the next one year and 7-8 product filings every
year post FY17. These filings would be mostly in OTC products (from existing
molecules), some from Auctus molecules and a few complex products from the
Virginia facility.
We believe GRAN's independent entry into the US store brand OTC segment is a
big game changer. It opens a huge opportunity for GRAN to scale up in a
profitable and sustainable business in the US, currently dominated by only one
player - Perrigo (~45% market share). Upon successful tenders from big retailers,
GRAN's OTC store brand business could grow at over 50% CAGR beyond FY18.
At present, only 31% of sales come from the high margin formulations business.
We believe this contribution would rise to 48-50% by FY20.
GRAN intends to expand API capacities of Paracetamol, Metfomin and
Guaifenecin by 25-30%, 3.5x and 2.7x, respectively, which will support both its
base and emerging businesses.
In FY16, GRAN has also increased its PFI capacity by 38-40% to 18,400MTPA.
This debottlenecking is likely to support 16-18% PFI revenue CAGR over the next
two years.
The company is coming up with a Greenfield multi-product API capacity at Vizag
to support the growing need of internal consumption and new filings.
GRAN has invested heavily in R&D. With the acquisition of the Virginia facility in
the US, it now has two R&D centers - one in Vizag for developing normal ANDAs
and one in Virginia for developing complex ANDAs.
With Omnichem CRAMs JV, GRAN would be entering into manufacturing of high
value APIs for innovators and other big MNCs. We project revenue of INR750m
in FY17 and INR1.25b in FY18. At its peak, the facility can generate revenue of
INR2.25b for Granules. Revenue is likely to grow rapidly beyond FY17 post site
approvals for the customers.
With US OTC, Rx products and Omnichem JV, the revenue contribution from
high margin businesses is likely to increase to ~75% of sales by FY20 from the
current 56%.
This will also be driven by higher operating leverage in the formulations
business, as capacity utilization increases from 50% presently to 100% by FY19,
with ramp-up in US business.
Driven by changing business mix and higher operating leverage, overall EBITDA
margin is likely to expand from 18.8% in FY16E to 23% in FY20E; EBITDA would
grow at a CAGR of 27% over FY16-20.
2
Augmented capacities to support base as well as emerging business
Omnichem CRAMs JV - entry into high value APIs
Not only growth, but profitability as well
13 August 2016

Granules India
Story in Charts
Exhibit 1: Revenues exhibited 7%YoY growth in 1QFY17
Revenue (INR m)
36
3,459
16
13
12
4
3,664
3,449
19
8
17%
3,723
5
3,437
7
528
524
545
490
627
689
677
783
692
17%
17%
14%
% YoY growth
Exhibit 2: EBITDA margins expanded 75bps YoY
EBITDA (INR m)
19%
19%
EBITDA M (%)
20%
21%
20%
3,110 3,076 3,197 3,546
Exhibit 3: Revenues to exhibit 14% CAGR over FY16-18E
Revenues (INR b)
43.4
%YoY growth
Exhibit 4: Formulation contribution to increase
FD (%)
PFI (%)
API (%)
0
34
27
32
5
31
26
32
Omnichem (%)
6
29
25
35
7
26
22
42
7
22
19
48
37.6
4.8
3.1
6.5
16.9
7.6
18.0
18.7
10.6
22.6 25.4
46
33
21
40
31
29
44
29
27
39
29
32
44
24
32
9.3
11.0 12.9 14.3 15.6 18.6 22.8 28.5
Exhibit 5: EBITDA margins to expand to 23.5% by FY20E
EBITDA (INR b)
16.1
EBITDA margin (%)
22.9 23.5
20.5 21.8
19.4
Exhibit 6: FCF to scale up from FY18E
Free Cashflows (INR m)
41.9
(0.9)
(37.0) (29.5)
-1,570
236
-294 -251
(99.2)
3.7
34.7
32.5 29.0
FCF/EBITDA (%)
11.8 12.1 11.1
1
1
1
14.4
2
2
3
3
4
5
7
2.6
103 84 1,317 1,509 2,326
-20
Exhibit 7: Capex needs to continue with growth
Capex (INR m)
2,649
1,163
250
550
1,473 1,335
2,328
1,519
Exhibit 8: Earnings to exhibit 34% CAGR over FY16-18E
EPS (INR/share)
2,002 2,097
1.0
1.5
1.6
3.7
4.5
5.5
6.8
9.8
13.6 18.6
Source: AIOCD, MOSL
Source: AIOCD, MOSL
13 August 2016
3

Granules India
Valuation and view
Over the last six years, GRAN reported 39% earnings CAGR on improved profitability,
higher operating leverage and superior business mix. It expanded its finished
dosages business at a CAGR of 36% over FY11-16, leading to higher profitability and
improved utilization of the existing capacity of 18b tablets. Profitability of the PFI
business has also improved substantially, with the implementation of 6MT order
capacity. As a result, GRAN has expanded its EBITDA margins from 11.8% in FY11 to
19.4% in FY16.
Going ahead, we expect 34% earnings CAGR to continue for next four years,
supported by 19% revenue CAGR and 410bp margin expansion. Our target price of
INR160 discounts GRAN’s FY18E EPS at 16x, which (a) is at 20% discount to sector
average, and (b) implies a PEG of 0.5x (FY16-18E EPS CAGR of 34%).
GRAN is currently trading at 19.9x FY17E and 13.8x FY18E EPS – at 30%+ discount to
sector average, which is unjustified, in our view. We argue for a P/E re-rating for
GRAN, given (a) strong EPS outlook – 34% CAGR over FY16-18E, backed by 19%
revenue CAGR (b) RoCE improvement from 14.0% to 16.4% by FY18E, and 23.0% by
FY20E (c) deleveraging – we expect net D/E to improve to 0.3x by FY18 (v/s 0.7x in
FY16).
Key catalysts to drive stock’s performance over the medium term
Finished dosages product approvals from regulated markets.
Greater traction in Auctus portfolio.
Higher than expected realizations from Omnichem JV.
Risks to our investment thesis
Pricing pressure on existing products.
Regulatory risks related to already approved manufacturing facilities.
Exhibit 10: P/E relative to Sensex
150
45.9
100
50
0
17.7
-50
-100
3.4
Exhibit 9: P/E band–Significant re-rating over past 24 mon.
50
40
30
20
10
0
2.6
7.8
12.5
PE (x)
Median(x)
Peak(x)
Min(x)
Avg(x)
Granules India PE Relative to Sensex PE (%)
LPA (%)
-30.2
Source: MOSL, Company
Source: MOSL, Company
13 August 2016
4

Granules India
Financials and Valuations
Consolidated - Income Statement
Y/E March
Income from Operations
Less: Excise Duty
Total Income from Operations
Change (%)
Total Expenditure
% of Sales
EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income
PBT
Current Tax
Deferred Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
FY12
6,636
96
6,540
37.6
5,747
87.9
793
12.1
207
586
170
14
430
99
32
30.3
300
300
43.3
4.6
FY13
7,838
194
7,644
16.9
6,793
88.9
851
11.1
231
620
177
21
464
124
14
29.7
326
326
8.8
4.3
FY14
11,167
209
10,959
43.4
9,376
85.6
1,583
14.4
298
1,285
204
43
1,124
305
66
33.0
753
753
130.8
6.9
FY15
13,279
350
12,929
18.0
10,843
83.9
2,086
16.1
527
1,560
323
43
1,280
287
83
29.0
909
909
20.8
7.0
FY16
14,603
308
14,295
10.6
11,528
80.6
2,767
19.4
643
2,124
399
77
1,802
535
82
34.2
1,185
1,185
30.3
8.3
FY17E
15,983
352
15,631
9.3
12,427
79.5
3,204
20.5
744
2,461
452
94
2,103
673
0
32.0
1,560
1,560
31.7
10.0
(INR Million)
FY18E
18,977
417
18,560
18.7
14,514
78.2
4,046
21.8
891
3,155
321
111
2,945
884
0
30.0
2,224
2,224
42.6
12.0
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Minority Interest
Deferred Liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Total Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY12
201
2,250
2,451
0
236
2,036
4,723
3,545
1,041
2,504
293
2
2,914
1,099
950
320
545
996
755
179
62
1,918
4,723
FY13
201
2,547
2,749
0
258
2,705
5,712
3,874
1,240
2,635
1,088
97
3,007
1,365
710
417
515
1,128
918
143
68
1,879
5,712
FY14
203
3,357
3,560
0
403
4,417
8,380
6,539
1,714
4,825
1,246
2
3,848
1,742
1,109
418
580
1,640
1,355
162
123
2,208
8,379
FY15
204
4,107
4,312
0
549
4,872
9,732
8,438
2,272
6,166
620
2
5,184
2,245
1,326
653
959
2,295
1,887
233
175
2,888
9,732
FY16
217
6,444
6,660
0
646
4,767
12,074
9,622
2,941
6,681
766
2
7,080
3,071
1,526
1,419
1,065
2,521
1,791
608
122
4,559
12,074
FY17E
228
8,797
9,025
0
646
4,267
13,939
11,622
3,684
7,938
1,094
2
7,722
3,310
1,668
1,580
1,164
2,884
1,931
665
288
4,839
13,938
(INR Million)
FY18E
228
10,609
10,837
0
646
3,767
15,251
13,122
4,575
8,547
1,114
2
9,003
3,866
1,981
1,774
1,383
3,481
2,255
789
436
5,522
15,251
13 August 2016
5

Granules India
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Debt/Equity
FY12
1.5
2.5
12.2
0.2
15.6
FY13
1.6
2.8
13.7
0.2
14.4
FY14
3.7
5.2
17.6
0.4
11.0
FY15
4.5
7.0
21.1
0.5
13.6
30.2
19.1
6.4
2.4
15.0
0.4
12.9
10.6
10.8
1.4
61
52
67
0.8
12.5
9.1
10.6
1.3
65
33
72
1.0
23.9
13.2
15.9
1.3
58
36
77
1.2
23.1
13.3
14.6
1.3
63
36
92
1.1
FY16
5.5
8.4
30.7
0.6
13.9
24.6
15.9
4.4
2.1
11.0
0.5
21.6
14.0
15.2
1.2
78
38
86
0.7
FY17E
6.8
10.1
39.6
1.0
17.2
19.7
13.3
3.4
1.9
9.3
0.7
19.9
14.1
15.8
1.1
77
38
87
0.5
FY18E
9.8
13.7
47.5
1.5
18.5
13.8
9.8
2.8
1.6
7.2
1.1
22.4
16.4
18.7
1.2
76
38
87
0.3
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(inc)/dec in FA
(Pur)/Sale of Investments
Others
CF from Investments
Issue of Shares
(Inc)/Dec in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
E: MOSL Estimates
FY12
430
207
164
-115
-436
249
7
256
-550
2
3
-545
0
691
-168
-35
489
200
120
320
FY13
463
231
165
-112
146
893
19
912
-1,163
-95
-20
-1,278
6
682
-178
-47
463
97
320
417
FY14
1,124
298
190
-238
-310
1,064
16
1,080
-2,649
95
8
-2,546
11
1,709
-205
-47
1,467
0
417
417
FY15
1,280
527
309
-317
-363
1,435
18
1,453
-1,473
0
17
-1,456
11
628
-319
-83
238
236
417
653
FY16
1,801
643
347
-490
-915
1,387
51
1,438
-1,335
0
53
-1,281
1,059
191
-406
-234
609
766
653
1,419
FY17E
2,103
744
358
-673
-119
2,413
0
2,413
-2,328
0
94
-2,235
1,203
-500
-452
-268
-17
161
1,419
1,580
(INR Million)
FY18E
2,945
891
210
-884
-326
2,836
0
2,836
-1,519
0
111
-1,408
0
-500
-321
-412
-1,234
194
1,580
1,774
13 August 2016
6

Granules India
Corporate profile
Company description
Exhibit 1: Sensex rebased
Incorporated in 1991, the Hyderabad-based
Granules India (GRAN) is a vertically integrated
manufacturer of pharmaceutical products. It is
among the largest manufacturers of Paracetamol
and Iboprofen in the world. It derives 63% of its
business from Europe and the US. GRAN also has a
formulations plant, with a capacity to produce 18b
tablets per annum. It has its own Abbreviated New
Drug Applications (ANDAs) and dossiers. GRAN
services more than 300 customers across 60 nations
(exports are ~87% of revenues).
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%)
Mar-16
51.1
1.2
6.4
41.3
Promoter
DII
FII
Others
Dec-15
49.5
1.1
5.8
43.6
Mar-15
48.6
0.1
4.0
47.3
Source: Capitaline
Exhibit 3: Top holders
Holder Name
BASAVA SANKARA RAO KOLLI
Government Pension Fund Global
% Holding
1.7
1.6
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
C Krishna Prasad
Uma Devi Chigurupati
Chaitanya Tummala
Designation
Chairman & Managing Director
Executive Director
Company Secretary
Exhibit 5: Directors
Name
A Arun Rao Akinepally
C Parthasarathy
Krishna M Ella
Harsha Chigurupati
Name
A P Kurian
K B Sankara Rao
L S Sarma
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Dhanunjaya & Haranath
Kumar & Giri
Internal
Statutory
Type
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
MOSL
forecast
6.8
9.8
Consensus
forecast
7.4
9.9
Variation (%)
-8.1
-1.0
Source: Bloomberg
Source: Capitaline
13 August 2016
7

Disclosures
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Granules India
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For U.S
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