Expect Paracetamol prices to stabilize over a quarter or two – Granules India

Update on Indian Equity Market:

A day ahead of monthly F&O expiry, markets were in sell-off mode largely led by banks as Nifty fell 1.8% to 14,549. Within the index, CIPLA (1.8%), ASIANPAINT (1.4%) and POWERGRID (0.9%) were the only gainers while TATASTEEL (-4.7%), TATAMOTORS (-4.2%) and ADANIPORTS (-3.8%) led the losers. Among the sectoral indices, only PHARMA (0.1%) managed to close in green while PSU BANK (-3.3%), METAL (-3.2%), and REALTY (-2.9%) led the losers.

Excerpts of an interview with Ms. Priyanka Chigurupati, ED & Head of Strategy, Granules India (GRANULES) with CNBC -TV18 dated 23rd March 2021:

• The bulk drug prices of common pain killer drug, Paracetamol, has risen by 75-80 percent in India over the past two to three months. This spike is due to a 60 percent price rise in the two key raw materials used to manufacture the drug.

• The prices went up from Rs 350 in the domestic market to around Rs 600. The key raw material, Para Amino Phenol (PAP) has seen a sharp increase in the last few months. One of the Chinese facilities responsible for about 46% of the PAP production in the world has shut down resulting in a supply shortage.

• On the other side, the Chinese companies have increased consumption of PAP due to increasing demand for Paracetamol, further adding pressure on the raw material. 

• The Company expects this to be a little blip for the next quarter or two. The management is confident of achieving year-end guidance.

• The Company expects excess supply of PAP in the world over the next few months. This will act as a catalyst for downward pressure on the prices.

• The Company has passed on the increased cost to its customers. The Company uses formula-based pricing with its strategic partners and has been able to take up most of the price increases. 

Asset Multiplier Comments:

• The rise in selling price will provide a boost to the top-line during the next quarter or two. This boost will be short-lived as the prices will revert to mean. The price rise has been sharp and may even see muted or slight decline in volumes.
• As the Company has able to pass on most of the cost rise to its customers, the absolute profitability will see growth. The Company may witness a dip in margins as the base for revenues is high due to higher realization.

Consensus Estimates (Source: market screener website):

• The closing price of GRANULES was ₹ 323/- as of 24-March-2021.  It traded at 15x/ 13x/ 11x the consensus EPS estimate of ₹ 21.8/ 24.8/ 29.7 for FY21E/22E/23E respectively.
• The consensus price target is ₹ 450/- which trades at 15x the EPS estimate for FY23E of ₹ 29.7/-

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