30 January 2017
3QFY17 Results Update | Sector: Healthcare
Granules India
BSE SENSEX
27,850
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
8,633
GRAN IN
Continued margin improvement; multiple levers ahead
221
After growing in low-to-mid single-digits for four quarters, revenue grew
25.7 / 0.4
11% YoY to INR3.6b (in-line) in 3QFY17. EBITDA margin came in at 21.2%
151 / 91
(+160bp YoY, +80bp QoQ; est. of 20.2%), much higher than ~11% in FY13,
3/-17/-12
172
led by product mix change and capacity expansion. EBITDA rose 17% YoY to
48.1
INR761m, implying a 4% beat. PAT grew 43% YoY to INR391m (in-line).
CMP: INR116
TP: INR160(+38%)
Buy
Financials & Valuations (INR b)
2016
2017E
Y/E Mar
14.3
14.3
Net Sales
2.8
2.9
EBITDA
1.2
1.6
PAT
5.5
7.0
EPS (INR)
22.8
27.8
Gr. (%)
30.7
40.9
BV/Sh (INR)
21.6
19.9
RoE (%)
14.0
11.7
RoCE (%)
21.0
16.5
P/E (x)
3.7
2.8
P/BV (x)
2018E
Finished dosage continues to deliver robust growth:
Finished dosage
16.8
3.5
2.0
8.0
15.2
59.3
16.6
9.9
14.3
1.9
Estimate change
TP change
Rating change
segment’s revenue grew 33% YoY to ~INR1.6b, driven by scale-up in Rx
business. Revenue of PFI segment declined ~7% YoY, while that of API
segment fell 11% YoY to INR1.2b. Capacity constraints, along with captive
consumption of API, led to muted revenue growth. GRAN expects revenues
to bounce back, led by expanded capacity in API and PFI segments.
Concall takeaways:
1) Plans to file six ANDAs by end-FY17 (including two
complex fillings from Virginia facility). 2) Plans to incur INR9b as capex over
FY17 and FY18 (spent ~INR2.65b in 9MFY17). 3) Re-inspection of the
Gagilapur-based CRAMS JV facility to start from tomorrow; the company
expects resolution over next few days. 4) Fixed asset to reach to INR16b post
FY18. The company expects asset turnover to reach ~2x over next few years.
Earnings acceleration to drive valuation upside:
GRAN trades at ~10x
FY19E EPS. We believe the stock has the potential deliver >50% return over
next 12-18 months, led by multiple re-rating (to >15x forward earnings) and
strong EPS CAGR of ~30%. Our TP of INR160 is based on 16x 1HFY19E PER.
FY17
2Q
3,638
3.1
2,896
742
20.4
185
83
39
513
156
30.4
-51
408
408
43.1
11.2
Est.
3QE
3,621
5.0
2,890
732
20.2
189
92
35
486
145
29.9
-50
391
391
43.8
10.8
-0.2%
Y/E March
(Consolidated)
Net Sales
YoY Change (%)
Total Expenditure
EBITDA
Margins (%)
Depreciation
Interest
Other Income
PBT before EO expense
Tax
Rate (%)
Minority Interest & Profit/
Loss of Asso. Cos.
Reported PAT
Adj PAT
YoY Change (%)
Margins (%)
Quarterly Performance (Consolidated)
1Q
3,226
3.7
2,599
627
19.4
139
81
14
420
133
31.6
2
285
285
24.8
8.8
FY16
2Q
3Q
3,529
3,449
14.7
7.9
2,844
2,772
685
677
19.4
19.6
144
167
88
114
10
26
462
422
144
151
31.1
35.7
-4
323
323
46.2
9.1
0
272
272
15.2
7.9
(INR Million)
Var.
vs Est
-0.7%
4Q
3,723
5.0
2,940
783
21.0
174
99
14
525
193
36.7
0
332
332
48.2
8.9
1Q
3,498
8.4
2,813
685
19.6
163
79
30
472
154
32.5
-71
390
390
36.5
11.1
3Q
3,595
4.2
2,832
763
21.2
187
84
43
535
176
32.9
-31
390
390
43.5
10.8
4QE
3,605
-3.2
2,856
749
20.8
188
100
28
489
151
30.9
-67
405
405
49.2
11.2
FY16
14,295
11.2
11,571
2,725
19.1
643
399
77
1,759
617
35.1
2
1,140
1,140
36.9
8.0
FY17E
14,336
0.3
11,397
2,939
20.5
723
346
140
2,010
637
31.7
-220
1,593
1,593
39.7
11.1
4.3%
10.1%
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
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 Business- Plans niche foray into Rx business
Granules is planning to file ~25-30 ANDAs in US till FY19E. Out of this ~10 complex
ANDAs will be filed from its US based Virginia facility and rest of them will be filled
from India facility located in Gagilapur. We expect couple of niche approvals to
come in FY19E. Management expects revenue of +USD100m from own ANDA fillings
in FY20E.
Granules has also acquired marketing rights from US Pharma for its 4 ANDAs
(scheduled to be launched from late FY18E to FY19E). Mkt size of these products are
>USD5b and revenue potential for the company could be of USD30-35m in FY19E.
Though we are already building in R&D spend of ~USD12m in our FY19E est, full year
revenue from own fillings will start only from FY20E onwards. In spite of this, we
estimate an improvement in consol EBITDA margins to the tune of 100bps due to
traction in base business and shift in product mix towards formulations.
Augmented capacities to support base as well as emerging business
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 ~15% 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.
Omnichem CRAMs JV - entry into high value APIs
With Omnichem CRAMs JV, GRAN would be entering into manufacturing of high
value APIs for innovators and other big MNCs. We project revenue of INR950m in
FY17E 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.
Not only growth, but profitability as well
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 19.4% in FY16 to >23% in FY20E; EBITDA would grow
at a CAGR of 25% over FY16-20E.
30 January 2017
2

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 30% EPS CAGR to continue for next four years, supported
by 19% revenue CAGR and 410bp margin expansion. Our target price of INR180
discounts GRAN’s FY19E EPS at 15x, which (a) is at 20% discount to sector average,
and (b) implies a PEG of 0.5x (FY16-19E EPS CAGR of 30%).
GRAN is currently trading at ~10x FY19E EPS – at 40%+ 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 – 30% CAGR over FY16-19E, backed by 19% revenue CAGR (b)
RoCE improvement from 14.0% to 16.3% by FY18E, and 22.7% 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 2: P/E relative to Sensex
150
100
50
Exhibit 1: P/E band Significant re-rating over past 30 months
50
40
30
20
10
0
2.6
12.0
12.0
PE (x)
Peak(x)
Avg(x)
45.9
Min(x)
Granules India PE Relative to Sensex PE (%)
LPA (%)
0
-50
-100
-34.5
-26.4
Source: MOSL, Company
Source: MOSL, Company
30 January 2017
3

Granules India
Story in Charts
Exhibit 3: Revenues exhibited 3%YoY growth in 2QFY17
Revenue (INR m)
16
13
12
4
15
8
5
8
3
4
% YoY growth
17% 17%
Exhibit 4: EBITDA margins expanded 100bps YoY
EBITDA (INR m)
EBITDA M (%)
21%
21%
20% 20%
19% 19% 20%
14%
524
545
490
627
685
677
783
685
742
763
Exhibit 5: Revenues to exhibit 19% CAGR over FY16-19E
Revenues (INR b)
Exhibit 6: Formulation contribution to increase
FD (%)
PFI (%)
API (%)
0
46
33
40
31
29
44
29
27
39
29
32
44
24
32
36
29
35
Omnichem (%)
6
37
25
38
7
36
24
39
7
30
19
33
4.8
6.5
7.6
11.0
12.9
14.3
14.3
16.7
24.0
21
Exhibit 7: EBITDA margins to expand to 22% by FY19E
EBITDA (INR b)
EBITDA margin (%)
19.4
20.5
21.0
22.0
Exhibit 8: FCF to scale up from FY18E
Free Cashflows (INR m)
236
41.9
-294 -251 -1,570
(37.0) (29.5)
(99.2)
(111.2)
-20
(0.9)
3.7
103
-3,179 -1,194 -1,392
(34.0) (26.4)
FCF/EBITDA (%)
11.8
12.1
11.1
14.4
16.1
Exhibit 9: Capex needs to continue with growth
Capex (INR m)
3,238
2,649
1,163
250
550
1,473 1,335
3,002 2,935
Exhibit 10: Earnings to exhibit 29% CAGR over FY16-19E
EPS (INR/share)
1.0
1.5
1.6
3.7
4.5
5.5
7.0
8.0
11.7
Source: Company, MOSL
30 January 2017
Source: Company, MOSL
4

Granules India
Financials and Valuations
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2012
6,540
37.6
793
12.1
207
586
170
14
0
430
130
30.3
0
300
300
43.3
2012
201
2,250
2,451
2,036
230
4,717
3,545
1,041
2,504
293
2
2,914
1,099
950
320
545
996
934
62
1,918
4,717
2013
7,644
16.9
851
11.1
231
620
177
21
0
464
138
29.7
0
326
326
8.8
2013
201
2,547
2,749
2,705
245
5,698
3,874
1,240
2,635
1,088
97
3,007
1,365
710
417
515
1,128
1,061
68
1,879
5,698
2014
10,959
43.4
1,583
14.4
298
1,285
204
43
0
1,124
371
33.0
0
753
753
130.8
2014
203
3,357
3,560
4,417
303
8,280
6,539
1,714
4,825
1,246
2
3,848
1,742
1,109
418
580
1,640
1,517
123
2,208
8,280
2015
12,929
18.0
2,086
16.1
527
1,560
323
43
0
1,280
371
29.0
0
909
909
20.8
2015
204
4,107
4,312
4,872
493
9,676
8,438
2,272
6,166
620
2
5,184
2,245
1,326
653
959
2,295
2,120
175
2,888
9,676
2016
14,295
10.6
2,767
19.4
643
2,124
399
77
0
1,802
617
34.2
0
1,185
1,185
30.3
2016
217
6,444
6,660
4,767
580
12,008
9,622
2,941
6,681
766
2
7,080
3,071
1,526
1,419
1,065
2,521
2,399
122
4,559
12,008
2017E
14,336
0.3
2,939
20.5
723
2,216
346
140
0
2,010
637
31.7
-220
1,593
1,593
34.4
2017E
228
9,102
9,330
6,767
580
16,677
12,622
3,664
8,958
1,004
2
9,172
2,810
3,928
1,366
1,068
2,459
2,171
288
6,714
16,677
2018E
16,762
16.9
3,520
21.0
890
2,630
351
140
0
2,420
774
32.0
-350
1,995
1,995
25.3
2018E
248
14,449
14,697
7,267
580
22,544
15,622
4,553
11,069
1,006
2
13,285
3,265
4,592
4,179
1,249
2,818
2,345
472
10,468
22,544
(INR Million)
2019E
24,012
43.2
5,283
22.0
1,265
4,017
621
144
0
3,540
1,133
32.0
-500
2,907
2,907
45.7
2019E
248
16,692
16,940
8,267
580
25,787
18,122
5,819
12,303
1,441
2
15,807
4,618
6,250
3,151
1,789
3,766
3,073
692
12,041
25,787
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
30 January 2017
5

Granules India
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
1.5
2.5
12.2
0.2
15.6
0.0
0.0
0.0
0.0
0.2
12.9
10.6
10.8
1.4
52
61
67
0.7
2012
793
7
-436
-115
7
256
-550
-294
2
3
-545
0
691
-168
-35
489
200
120
320
2013
1.6
2.8
13.7
0.2
14.4
0.0
0.0
0.0
0.0
0.2
12.5
9.1
10.6
1.3
33
65
72
0.8
2013
851
8
146
-112
19
912
-1,163
-251
-95
-20
-1,278
6
682
-178
-47
463
97
320
417
2014
3.7
5.2
17.6
0.4
11.0
31.0
6.6
2.8
19.6
0.3
23.9
13.2
15.9
1.3
36
58
77
1.1
2014
1,583
29
-310
-238
16
1,080
-2,649
-1,570
95
8
-2,546
11
1,709
-205
-47
1,467
0
417
417
2015
4.5
7.0
21.1
0.5
13.6
25.8
5.4
2.4
15.0
0.4
23.1
13.3
14.6
1.3
36
63
92
1.0
2015
2,086
29
-363
-317
18
1,453
-1,473
-20
0
17
-1,456
11
628
-319
-83
238
236
417
653
2016
5.5
8.4
30.7
0.6
13.9
21.0
3.7
2.1
11.0
0.5
21.6
14.0
15.2
1.2
38
78
86
0.5
2016
2,767
25
-915
-490
51
1,438
-1,335
103
0
53
-1,281
1,059
191
-406
-234
609
766
653
1,419
2017E
7.0
10.2
40.9
1.0
16.8
16.5
2.8
2.3
11.1
0.8
19.9
11.7
12.5
0.9
98
72
77
0.6
2017E
2,939
0
-2,207
-637
0
95
-3,238
-3,143
0
140
-3,098
1,345
2,000
-346
-48
2,951
-52
1,419
1,366
2018E
8.0
11.6
59.3
1.5
22.5
14.3
1.9
1.8
8.6
1.3
16.6
9.9
11.3
0.7
98
71
70
0.2
2018E
3,520
0
-778
-774
-163
1,804
-3,002
-1,198
0
140
-2,862
3,820
500
-351
-99
3,871
2,813
1,366
4,179
2019E
11.7
16.8
68.3
2.2
22.8
9.8
1.7
1.3
6.1
1.9
18.4
12.0
14.1
0.9
93
70
63
0.3
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
2019E
5,283
0
-2,399
-1,133
-203
1,548
-2,935
-1,387
0
144
-2,791
0
1,000
-621
-164
215
-1,028
4,179
3,151
30 January 2017
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).
Exhibit 2: Shareholding pattern (%)
Sep-16
Promoter
DII
FII
Others
51.0
0.9
8.2
39.9
Jun-16
51.1
1.0
7.2
40.8
Sep-15
48.4
1.0
7.3
43.3
Source: Capitaline
Source: MOSL/Bloomberg
Exhibit 3: Top holders
Holder Name
BASAVA SANKARA RAO KOLLI
SWISS FINANCE CORPORATION (MAURITIUS)
LIMITED
NA
NA
NA
% Holding
1.7
1.0
0.0
0.0
0.0
Source: Capitaline
Note: FII Includes depository receipts
Exhibit 4: Top management
Name
C Krishna Prasad
Uma Devi Chigurupati
V V N K V Prasada Raju
Chaitanya Tummala
Designation
Chairman & Managing
Director
Executive Director
Executive Director
Company Secretary
Exhibit 5: Directors
Name
K B Sankara Rao
A P Kurian
Krishna M Ella
Harsha Chigurupati
Name
A Arun Rao Akinepally
C Parthasarathy
L S Sarma
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Dhanunjaya & Haranath
Kumar & Giri
Saurabh Poddar & Associates
Internal
Statutory
Secretarial Audit
Type
Exhibit 7: MOSL forecast v/s consensus
EPS
(INR)
FY17
FY18
FY19
MOSL
forecast
7.0
8.0
11.7
Consensus
forecast
7.6
9.9
13.6
Variation (%)
-7.5
-19.1
-14.1
Source: Bloomberg
Source: Capitaline
30 January 2017
7

GRANULES INDIA GALLERY
GRAN
Our recent reports on Healthcare sector
Our recent reports on other Healthcare companies

Granules India
NOTES
30 January 2017
9

Disclosures
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30 January 2017
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