Company Report BROKING DEPOSITORY DISTRIBUTION FINANCIAL ADVISORY Granules India Ltd. 21 st July, 2012 CMP Target Price Rs.149.30 Rs.200.00 Granules India is among the leading global manufacturer of highvolume APIs including Paracetamol, Ibuprofen, Metformin and Guaifenesin. Additionally, Granules pioneered the concept of commercialising PFIs and is the world s largest PFI facility. BSE Code 532482 NSE Code GRANULES Market Cap (Rs Mn) 299.66 52 Week High/Low 151.60/55.00 Industry Pharmaceuticals Face Value Rs.10.00 Shares O/S 20071154 EPS 14.90 Book Value 121.93 P/E 10.02 P/B 1.22 Shareholding Pattern The Indian pharmaceutical industry grew at a CAGR of 14% in the five years leading to FY12; Granules revenues grew at a 28% CAGR during the period. GIL continued to strengthen its position in the rapidly growing market and is aiming at achieving productivity gains, growth in volumes, sustained margins and neutralising cost increases. The company has registered smart numbers for the quarter ending March 2012. The revenue from operations has increased by 56.89% at Rs 188.09 crore for quarter under review as compared to Rs 119.89 crore for the quarter ended March 31, 2011 translating in operating profit of Rs.25.82 crore; up by 46.37% y-oy. A comparatively tremendous net profit growth of 85.71% to Rs. 16.38 was reported for the Q4FY12 compared to Rs.8.82 crore of same quarter previous year. Growth in revenue and profits was driven by higher growth in the finished dosage segment. EPS almost doubled at Rs.8.15 y-o-y. GIL offers all three components of the pharmaceutical value chain which gives the customers flexibility and choice. It manufactures PFIs (strategically backward integrated through the in-house manufacture of APIs) to finished dosages (tablets in bulk). Valuation Research Analyst: Vineeta Mahnot research@hemonline.com With efficient manufacturing value chain, increasing utilization, complete vertical integration and capacity expansion GIL s revenue visibility looks strong. We believe GIL is trading at an attractive valuation at 7.17x and 5.2x of FY13EPS of Rs.20.82 and FY14EPS of Rs.28.73. We initiate a BUY on the stock with a target price of Rs.200 (appreciation of about 34%) with the short to medium term investment horizon. For Private Circulation Only 1 Hem Research
Business Details Granules India (GIL) was incorporated as Private Limited Company in 1991 and was converted into a Public Limited Company in 1993. It is a fast growing pharmaceutical manufacturing company with world class facilities partnering with market leaders to offer pharmaceutical products and services and is committed to manufacturing excellence, quality and customer service. Granules India (GIL) has a long history as a producer of active pharmaceutical ingredients (API's) and pharmaceutical formulation intermediates (PFIs) with complete vertical integration for quality conscious customers in the regulated and semi-regulated markets. They support customers with unique value, extensive product range and a global network of associates. The Company is headquartered in Hyderabad with sales offices in the U.S., the U.K., Colombia and China. The Company services the growing needs of more than 300 customers across 60 nations. GIL is a fully vertically integrated pharmaceutical manufacturing company with three core lines: Active Pharmaceutical Ingredients (APIs) Granules has 3 factories manufacturing APIs. It is among the top global manufacturers of Paracetamol and Ibuprofen. Pharmaceutical Formulation Intermediates (PFIs) Granules pioneered the concept of PFIs and currently has 2 factories manufacturing single and multiple - active PFIs. Its Gagillapur facility has an industry-leading 6 MT single batch size. Finished Dosages (FDs) Granules has a dedicated FD plant at the Gagillapur facility. Its plant has the capacity to produce 6 billion tablets annually and is scalable up to 18 billion tablets. The facility has received approval from U.S.FDA, Infarmed and the Australian TGA. For Private Circulation Only 2 Hem Research
Strong industry growth India's pharmaceutical sector is gaining its position as a global leader. The domestic pharmaceutical market (IPM) grew 21.9 per cent to record sales of Rs 5,369 crore (US$ 1.01 billion) in March 2012, as compared to the previous year, according to an analysis by a market research firm, All India Organisation of Chemists and Druggists (AIOCD) AWACS. The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth US$ 9,173.50 million between April 2000 to February 2012, according to the latest data published by Department of Industrial Policy and Promotion (DIPP). India tops the world in exporting generic medicines worth US$ 11 billion. Currently, the Indian pharmaceutical industry is one of the world's largest and most developed. India has world renowned capacity in producing low cost, high quality bulk and generic drugs. Export-import growth Export Import Rs. Crores (% chg.) Rs. Crores (% chg.) 2005-06 22,116 23.8 4,551 43.6 2006-07 26,895 21.6 5,852 28.6 2007-08 30,760 14.4 6,713 14.7 2008-09 40,422 31.4 8,675 29.2 2009-10 42,456 5.0 9,959 14.8 2010-11 47,363 11.6 10,826 8.7 2011-12E 60,865 28.5 13,412 23.9 2012-13E 73,925 21.5 16,324 21.7 2013-14E 78,598 6.3 17,205 5.4 Drug exports from India in rupee terms, were higher by 32.6 per cent to Rs.56,842 crore compared to the year ago period. A weak rupee and healthy demand for generic drugs contributed to the growth. Drug exports to the US rose by 39.1 per cent during April 2011-February 2012. The US is the largest market for Indian generic drug exports. Exports to UK and Germany grew by 32.3 per cent and 34.5 per cent, respectively. Exports to Russia and Brazil were higher by 28.9 per cent and 28.6 per cent, respectively. In rupee terms, imports were higher by 22.5 per cent to Rs.12,937.6 crore during April 2011-February 2012. Indian pharma industry is the largest exporter of generic drugs. And capitalising on their expertise in process engineering and low cost advantage, the pharma industry continues to achieve a larger share in the pie of global generics market. For achieving this, the domestic companies are also diversifying their product portfolios, becoming vertically integrated across the manufacturing process and expanding their geographic presence especially in the emerging markets. CMIE expects drug exports to have grown by 28.5 per cent to Rs.60,865 crore in 2011-12 and Rs.73,925 crore in 2012-13. Exports are likely to grow by 21.5 per cent during the year. For Private Circulation Only 3 Hem Research
The global pharmaceutical sector will witness the biggest patent-expiration wave in 2012. The peak of the patent expiration wave in 2011 and 2012 will witness over USD40 bn of branded sales going generic in the world s largest pharma market. Around USD 80 billion worth of drugs are expected to go off-patent in 2012-13. Drugs worth USD125 bn are expected to go off-patent between 2011and 2016 in the U.S. against only USD71 bn during 2006-10 (IMS Data). Developed countries like the US, UK and Japan are moving from branded drugs to unbranded or generic drugs. The rising healthcare cost has prompted the government of these companies to turn to the generic mode to curtail costs. In order to take advantage of the patent-cliff, domestic generic companies are scaling up their R&D facilities. In order to encourage R&D, the government extended investment linked benefits to the drug industry in the Union Budget 2012-13. On an average, R&D expenditure accounts for six per cent of the pharma industry s sales. In 2011-12, four R&D projects entailing a total cost of Rs.420 crore were commissioned. In the June 2012 quarter, two R&D projects were commissioned. Biocon commissioned its R&D project at Pune at a cost of Rs.200 crore. Granules India commissioned its R&D centre project at Pune. Another four R&D project with a total investment of Rs.336.6 crore are likely to commission during 2012-13. During July 2012-March 2013, 53 projects worth over Rs.5,515.4 crore are scheduled to commission. In 2013-14, 19 projects worth over Rs.3,450.5 crore are scheduled to commission. In order to harness the full potential of the Comprehensive Free Trade Agreement with Japan, India is likely to press the former for further opening of the pharmaceutical sector. This would help the domestic industry to leverage Comprehensive Economic Partnership Agreement (CEPA) and increase its share in the Japanese market. Indian pharmaceutical industry would gain significantly from the pact as Japan, the world's second largest market, had agreed to cut duties on imports of Indian generic drugs The Ministry of Commerce has proposed an ambitious Strategy Plan to double pharmaceutical exports from US$ 10.4 billion in 2009-10 to US$ 25 billion by 2013-14. The Government has also planned a 'Pharma India' brand promotion action plan spanning over a three-year period to give an impetus to generic exports. On the back of increasing middle-class population base, improvements in medical infrastructure and the establishment of IP rights, the Indian pharma industry is estimated to grow manifolds. Strong growth in exports will boost the sales growth of the industry. The domestic demand is also expected to remain healthy. Hence, net sales of the industry is expected to grow by 16.8 per cent in 2012-13. A slower 3.1 per cent growth in other expenses will help to improve the core operating performance which is expected to penetrate to the net levels. The PAT is likely to grow by a robust 52.3 per cent during the year. Profit margins are likely to expand. For Private Circulation Only 4 Hem Research
Efficient business model While most pharmaceutical manufacturers focus on one product vertical-active pharmaceutical ingredients and Finished Dosages (APIs or FDs); Granules cover all three aspects APIs, PFIs and FDs, which enables the Company to add value throughout the manufacturing value chain. The company s FD facility is among the world s largest singlesite capacity facilities; while its API facilities are among the premier facilities for quality-conscious customers. The company has diversified its sales by reducing contribution from Paracetamol to less than 50% in FY12 from 70% in FY08. It has increased sales of higher value products that offer stronger margins like Metformin, Ibuprofen and Guaifenesin. For Private Circulation Only 5 Hem Research
Capacity expansion In financial year 2011-12, the Company commenced work on an expansion at its Gagillapur facility. The expansion involved a capacity expansion in the PFI and Finished Dosage facilities. Granules moved up the value chain from APIs to PFIs and Finished Dosages, which it expects to continue going ahead too. Several projects to increase API capacity were implemented during FY12, with many of the projects finishing in late Q4FY12. The full benefits of these projects will be realized in FY13; API capacities increased 18% over the past three year. The PFI facility was expanded with the addition of two modules: Module-C, a state-of-the-art module with a capacity of 8,400 tons and Module-D, a facility with a capacity of 1,200 tons. In early FY13, Granules will complete expansion plans that will more than double our PFI capacity to 18,000 tonnes while tripling its FD capacity to 18 billion doses. The expansion will strengthen GIL s position as the largest PFI producer and will give it one of the largest single-site finished dosage facilities. GIL has the advantage of building the capacities in the same premises as regulatory approvals are already there. GIL expects FY13 to be a breakout year for the company with all the new capacities coming up. The company has a strong order book and expects healthy capacity utilization in FY13 which would result in increased margins. Joint venture with Ajinomoto Omnichem to reap benefits soon Granules entered into a (50:50) joint venture with Ajinomoto Omnichem, a leading CRAMs manufacturer and a Belgium based Company during the financial year 2011-12. The JV will manufacture pharmaceutical intermediates and APIs in a greenfield facility in Visakhapatnam (AP) and mainly focus on high-value, low-volume APIs for the regulated markets. The JV is focued on high-value APIs in several therapeutic sectors including oncology, cardiovascular and central nervous system (CNS). In FY13 the JV will commence operations but revenues will start kicking in FY14-FY15. The JV will be benefitted with the technological excellence and operating efficiency of Granules together with wide customer base and extensive product portfolio of Omnichem. For Private Circulation Only 6 Hem Research
Strong financial performance Granules has come out with excellent numbers for the financial year ending March 2012. Its revenues grew by sharp 38% at Rs.654 crore from Rs.475 crore; it continued the trend of outperforming the industry. About 50% of the Company s revenues were derived from customer relationships longer than five years; proportion of revenues from fixed contracts increased from 23% in FY10 to 48% in FY12. More than 68% of the revenues in FY12 came from regulated markets. Operating profit stood at Rs.79 crore compared to Rs.57 crore in the previous financial year 2010-11 registering a growth of 39% in the current financial year. The Company registered growth on all fronts. Net profit skyrocketed 43% at Rs.29.95 crore from Rs.20.90 crore. EPS for the financial year ended March 2012 stood at Rs.14.90. API revenues increased 20% from Rs.151 Cr. in FY11 to Rs.181 Cr. Paracetamol output increased from 800 TPM to 1,000 TPM within two quarters with relevant de-bottlenecking and minimal capital expenditure. Metformin production increased from 100 TPM in FY11 to 150 TPM and Guaifenesin production increased from 60 TPM in FY11 to 100 TPM through process improvements. PFIs revenues increased 27% from Rs.155 crore in FY11 to Rs.197 crore supported by increased production volumes and improved realizations (effect of price increases). During the year, GIL commissioned Module D (1,200 TPA) at Gagillapur. Revenues from Finished Dosages climbed sharply by 83% from Rs.101 crore to Rs.185 crore in FY12. During the year, the company received an approval for its Naproxen Sodium 220 mg ANDA and also filed ANDA with USFDA for Ibuprofen Rx. For Private Circulation Only 7 Hem Research
Consolidated Profit & Loss Account Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Net sales 461.09 475.18 653.97 850.16 1062.69 Growth 3.06% 37.62% 30.00% 25.00% Expenditure 399.65 418.36 574.83 743.89 927.73 EBITDA 61.44 56.82 79.14 106.27 134.96 Growth -7.52% 39.29% 34.29% 27.00% EBITDA margin 13.32% 11.96% 12.10% 12.50% 12.70% Other income 12.28 0.80 1.35 1.70 2.34 Depreciation & Amortization 18.57 18.87 21.43 26.31 30.47 EBIT 55.15 38.75 59.07 81.66 106.83 EBIT margin 11.96% 8.15% 9.03% 9.60% 10.05% Interest 17.55 11.99 16.09 21.86 24.33 PBT 37.60 26.76 42.98 59.79 82.51 Tax 7.22 5.86 13.02 17.94 24.75 PAT 30.38 20.90 29.95 41.86 57.75 Minority interest/share of JV/Associates 0.00 0.00 0.00 0.00 0.00 Adjusted PAT 30.38 20.90 29.95 41.86 57.75 Growth (31.22) 43.35 39.74 37.98 Net Profit margins 6.59 4.40 4.58 4.92 5.43 Extraordinary item 0.00 0.00 0.00 0.00 0.00 Reported PAT 30.38 20.90 29.95 41.86 57.75 Equity Capital 21.74 20.06 20.06 20.06 20.06 Res. & Surplus 180.64 199.72 225.03 261.86 313.58 Equity Shares 2.17 2.01 2.01 2.01 2.01 EPS 14.00 10.40 14.90 20.82 28.73 Ratios Particulars FY10 FY11 FY12 FY13E FY14E Return on Equity 15.01 9.51 12.22 14.85 17.31 Return on Capital employed 15.80 11.37 13.22 15.56 18.12 Debt/Equity 0.72 0.55 0.82 0.86 0.77 Asset turnover 1.11 1.09 1.14 1.27 1.43 Current Ratio 3.54 2.53 2.77 2.83 2.85 Book value per share 93.26 109.34 121.93 140.26 165.99 For Private Circulation Only 8 Hem Research
Balance Sheet Rs. Crore Particulars FY10 FY11 FY12 FY13E FY14E Share Capital 21.74 20.06 20.06 20.06 20.06 Reserves & Surplus 180.64 199.72 225.03 261.86 313.58 Shareholders funds 202.38 219.78 245.09 281.92 333.64 Borrowings 146.70 120.99 201.66 242.90 256.07 Deferred tax Liability 17.04 19.86 23.02 23.02 23.02 Sources of funds 366.12 360.62 469.76 547.84 612.73 Gross block 302.76 322.61 355.83 404.84 487.47 Accumulated Depreciation 65.99 83.99 105.41 131.72 162.19 Net block 236.77 238.62 250.42 273.12 325.28 Capital work in progress 2.45 6.85 29.30 37.65 31.68 Investments 0.30 0.30 10.45 14.56 12.12 Projects in progress 0.00 0.00 0.00 0.00 0.00 Inventories 68.63 75.13 109.91 130.76 138.88 Sundry debtors 65.85 71.61 95.01 120.44 129.50 Cash and bank balance 13.47 11.99 31.98 37.85 43.17 Other current assets 1.86 18.52 21.37 24.09 26.27 Loans and advances 24.47 12.74 22.88 30.97 37.54 Total current assets 174.29 190.00 281.15 344.11 375.36 Deferred tax asset 0.00 0.00 0.00 0.00 0.00 Current liabilities and provisions 49.26 75.14 101.55 121.59 131.70 Net current assets 125.03 114.85 179.59 222.52 243.65 Misc exp 1.57 0.00 0.00 0.00 0.00 Uses of funds 366.12 360.62 469.76 547.84 612.74 For Private Circulation Only 9 Hem Research
Consolidated Quarterly Financial Highlights Rs. Crore Particulars Q4FY12 Q4FY11 Q3FY12 YoY% QoQ% Revenues 188.09 119.89 185.70 56.89 1.29 Expenditures 162.27 102.25 160.50 58.70 1.10 Operating Profit 25.82 17.64 25.20 46.37 2.46 Net Profit 16.38 8.82 7.99 85.71 105.00 OPM% 13.73 14.71 13.57 (98bps) 16bps NPM % 8.71 7.36 4.30 135bps 441bps EPS 8.15 4.40 3.98 85.23 104.77 Past Price movement of the stock For Private Circulation Only 10 Hem Research
www.hemonline.com research@hemonline.com HEM SECURITIES LIMITED MEMBER-BSE,CDSL, SEBI REGISTERED CATEGORY I MERCHANT BANKER MUMBAI OFFICE: 14/15, KHATAU BLDG., IST FLOOR, 40, BANK STREET, FORT, MUMBAI-400001 PHONE- 0091 22 2267 1000 FAX- 0091 22 2262 5991 JAIPUR OFFICE: 203-204, JAIPUR TOWERS, M I ROAD, JAIPUR-302001 PHONE- 0091 141 405 1000 FAX- 0091 141 510 1757 GROUP COMPANIES HEM FINLEASE PRIVATE LIMITED MEMBER-NSE HEM MULTI COMMODITIES PRIVATE LIMITED MEMBER-NCDEX, MCX HEM FINANCIAL SERVICES LIMITED NBFC REGISTERED WITH RBI For Private Circulation Only 11 Hem Research
Disclaimer & Disclosure: This document is prepared for our clients only, on the basis of publicly available information and other sources believed to be reliable. Whilst we are not soliciting any action based on this information, all care has been taken to ensure that the facts are accurate, fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sell of any financial instrument and at any point should not be considered as an investment advise. Reader is requested to rely on his own decision and may take independent professional advise before investing. Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited, Directors and any of its employees shall not be responsible for the content. The person accessing this information specifically agrees to exempt Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and further agrees to hold Hem Securities Limited, Hem Finlease Private Limited, Hem Multi Commodities Pvt. Limited or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The companies and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities there of, company (ies) mentioned here in and the same have acted upon or used the information prior to, or immediately following the publication. Disclosure of Interest Statement Company Name 1. Analyst Ownership of the Stock No 2. Hem & its Group Company Ownership of the Stock No 3. Hem & its Group Companies Director Ownership of the Stock No 4. Broking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. For Private Circulation Only 12 Hem Research