Granules

Update on the Indian Equity Market:

On Thursday, NIFTY ended at 17,606 (+0.8%) as it closed near the intraday high of 17,639. Among the sectoral indices, MEDIA (+1.7%), METAL (+1.2%), and FINANCIAL SERVICES (+1.2%) ended higher, whereas AUTO (-0.1%), and PSU BANK (-0.1%) were the losers. Among the stocks, ONGC (+3.6%), TATASTEEL (+2.0%), and INFY (+2.0%) led the gainers while MARUTI (-1.7%), IOC (-0.9%), and SHREECEM (-0.7%) led the losers.

Granules released its 3QFY22 results on 8^th February. Following aren the excerpts of an interview with Mr. Krishna Prasad Chigurupati, Chairman and MD of Granules India (GRANULES) with CNBC TV18 on 9^th February 2022:

• The company has been operating at 60% of its production capacity for Paracetamol due to raw material shortages. It sells only APIs (active pharmaceutical ingredients) in India. All of its FDs (finished dosages) are sold in Europe and the US.
• The company’s FD segment is more profitable than its other segments. The share of FDs as a part of revenues fell by 3-4%. This fall is due to inventory rationalisation by its customers in US. The company states this as one of the reasons that the margins couldn’t improve. The management sees some uptick in FD sales going forward.
• Paracetamol’s prices have been increased to pass on the raw material price increases to the customers.
• The freight cost is an important component for the company and the costs haven’t improved in the last 6 months. The freight costs can go as high as 4-5% of the company’s revenues.
• In FY23, the company will be crossing EBITDA margins of around 20-21%, but it is not confident of achieving the margins of 23%. The company expects to achieve a minimum of 12% growth in revenues by FY23 end.
• The company received 3 ANDA approvals in the US in 3QFY22. The company expects the market size for their aggregate to be around USD 400-500 mn. The company doesn’t expect any growth in revenues from these products.
• The company plans to enter new geographical markets such as the Canadian, and South African markets. The company expects its new markets to account for 35-40% of its revenues, instead of 25-30% of total revenue as of now.

 Asset Multiplier Comments

• The raw material prices for the company’s molecules (core and non-core) and freight costs are likely to stay high for the next 2 quarters. Therefore, we expect the EBITDA margin to be under pressure during this period.
• As the company’s supplier for Paracetamol-related raw materials is about to start its plant by 15^th Feb 2022, we expect the situation of raw material shortage to reduce from March.

Consensus Estimate: (Source: market screener website)

• The closing price of GRANULES was ₹ 312/- as of 10-February-2022. It traded at 18x/13x/11x the consensus earnings estimates of ₹17/24.2/27.9 for FY22E/FY23E/FY24E respectively.
• The consensus target price of ₹ 359 /- implies a P/E Multiple of 13x on FY24E EPS estimate of ₹ 27.9/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Update on the Indian Equity Market:

On Thursday, NIFTY closed marginally higher (+0.2%) at 11,269 after a continuous losing streak in the previous days. The top gainers in NIFTY50 were Yes Bank (+26.9%), Eicher Motor (+2.9%) and Kotak Bank (+2.6%), whereas Zeel (-5.6%), Hindalco (-2.9%) and Infratel (-2.6%) were the top losers. Among sectoral indices, PSU Bank (+1.4%), FMCG (+1.1%) and Pharma (+0.7%) were the gainers while Realty (-1.1%), Metal (-0.8%) and Media (-0.7%) closed in red.

Excerpts from an interview of Mr. Krishna Prasad Chigurupati, Chairman and MD- Granules India with CNBC-TV18 dated – 3^rd March 2020:

• He said, “We just have to apply to the Directorate General of Foreign Trade (DGFT) for permissions and then they would give us permission to export based on past exports”.
• In the worst case, maybe some of the shipments from this month may spill over to next month. Otherwise, two quarters put together he doesn’t see any big impact.
• Most of the intermediates or the raw materials come from China. For example with regards to Paracetamol – the key intermediate comes from China and there has been a disruption or delay for about a week.
• They have inventory for another 10 days but materials are arriving. So, there could be a gap of about 2-3 days without inventory but the shipments are already on the way and they should be getting them by next week. So, there is no issue on the inventories side.
• It depends on how quickly the government acts on awarding permission to exports so there could possibly be little spill over into the next quarter. There could be a little fall in 4QFY20 which will be made up in the next quarter.
• Airlifting of some products is happening. Air freights have gone up, the prices have gone up and there could be an increase in the cost of raw materials.
• As far as their products are concerned there is absolutely no issue, everything is coming by sea. So, he doesn’t see any impact on margins.
• They supply APIs to Indian companies, Paracetamol especially, but formulations are all for exports. They never sell any formulations within India. 

Consensus Estimate: (Source: market screener website)

• The closing price of Granules India was ₹ 178/- as of 05-March-2020.  It traded at 13x/ 11x/ 9x the consensus earnings estimate of ₹ 13.6/ 15.5/ 19.2 for FY20E/FY21E/FY22E respectively.
• The consensus target price for Granules is ₹ 172/- which implies a PE multiple of 9x on FY22E EPS of ₹ 19.2/-.