by Suhani Adilabadkar

Granules India, a leading pharmaceutical company in the generic space, manufactures APIs (Active Pharmaceutical Ingredients), PFIs (Pharmaceutical Formulation Intermediaries) and FDs (Finished Dosages) with US and Europe customers its major revenue generators. The stock has doubled since touching its 52-week low of Rs 84 last year. 

Granules’ stock price has been gaining strongly on the back of key drug approvals from the USFDA, a robust product pipeline, government uplifting export restrictions on paracetamol and strong guidance maintained by the management in the coronavirus landscape. The company, which is based out of Hyderabad, has seven manufacturing facilities catering to more than 250 customers with presence in 60 countries. It has three main subsidiaries, Granules Pharmaceuticals Inc, focused on advanced formulation development with manufacturing set-up at Virginia, US, Granules USA Inc (for marketing in the US) and Granules Europe (for marketing in Europe). 

Quick Takes:

• Granules reported revenue decline of 2% at Rs. 600 crore in Q4 FY20.

• Without one offs and exceptional gain, PAT increased by 18% YoY in march quarter FY20.

• Granules aims to achieve revenue CAGR of 20%, 25% for PAT and steady state of EBITDA margins of more than 21% for the next three years.  

• Promoter pledge will be reduced considerably after completion of buyback offer.

Government restrictions on exports hit March Quarter FY20 revenues 

Granules reported revenue decline of 2% due to government restrictions on export of paracetamol API, PFI and FDs. Revenues were at Rs. 600 crore in Q4 FY20 against Rs. 613 crore same period previous year. North America contributed 58%, Europe 14%, Latin America 8%, India 17% and 3% ROW to the total revenue mix. Operating profit stood at Rs. 100 crore in Q4 FY20 compared to Rs. 97.6 crore corresponding quarter previous year, rising just 2% YoY impacted by Rs. 22 crore impairment of investments in its US pharma business and higher employee costs (up 44% YoY). Operating margin expanded 75 bps YoY from 15.91% in Q4 FY19 to 16.66% in Q4 FY20. Net Profit or PAT stood at Rs. 92.3 crore in Q4 FY20 against Rs. 64 crore the corresponding quarter previous year, growing 44% YoY. This was aided by an exceptional gain of Rs. 59.7 crore from the sale of Omnichem JV. 

Without one offs and exceptional gain, PAT still increased by 18% YoY in march quarter FY20. R&D expense as a percentage of sales stood at 3.6% in Q4 FY20 and at Rs. 156.6 crore for FY20.  

Analysis: decline in debt as capex cycle concludes

Granules stock has gained 68% over the past one year. And while the pharma space is back in investor radar after covid-19 outbreak, Granules has sparked interest as a result of its strong performance with its top and bottom-line moving at CAGR of 15% and 28% respectively over the past five years. Other significant parameters, net debt to EBITDA has declined from a high of 3.1 in march 2018 to 1.2 as on 31st March 2020 and capex cycle of Rs. 1200 crore spread over past 4 years has come to an end. 

Granules has mainly three business segments, core molecules, US generics and Onco API facility. Core molecules, are the backbone of Granules growth trajectory contributing 85% of its total revenues. These high volume five molecules are Paracetamol, Metformin HCl, Ibuprofen, Guaifenesin and Methocarbamol, known as the ‘first line of defence’ manufactured and sold in all three formats, namely FDs, APIs and PFIs. 

The company has widened the core group by adding three new molecules, Losartan, Cetrizine, and Fexofenadine in FY20 and also expanded into different dosage forms for instance from paracetamol 500 to paracetamol 650 and from Metformin IR to Metformin XR. In this context, Ms Priyanka Chigurupati, Executive Director, Granules Pharmaceuticals Inc, said, “In addition to all this, we are also expanding the presence of our core molecules across geographies, so we are also mitigating our concentration in the US for core molecules”. In the March quarter, core molecules have reported a 5% revenue decline due to export restrictions on paracetamol, lockdown in last week of march and increased contribution from other molecules. 

Next in line, US generics division constituting 15-20% of revenue basket is expected to clock a higher growth rate on the back of recently launched generic versions of Methergine, Methocarbamol and Metformin XR, and the management is expecting 8-9 launches in FY21 with an addressable market size of about $ 2.5 bn. 

In addition to that, Granules is going to file 20-25 products for approval over the next three years. And lastly, the onco API facility, though operationalized in march quarter is expected to break even in FY21 and start contributing revenue and generating profits from FY22. The onco unit has recently received EU GMP approval valid for three years. 

But what has interested the market most is the strong growth guidance given by the management for the next three years. Granules aims to achieve revenue CAGR of 20%, 25% for PAT and steady state of EBITDA margins of more than 21%. 

Another positive development during the quarter has been its buyback offer of Rs. 250 crore which will get completed by first week of July. The move will reduce promoter pledge from the current levels of 45.4% (16.1% of total equity share capital) to 4-5% of total equity share capital after the completion of buyback offer (125 lakh shares).

With the completion of its capex cycle, manageable debt levels, strong free cash flows, robust first line of defence products, scaling up of US generics business and onco API contribution from FY22 to bottom-line, growth trajectory is set for a higher take off. 

Covid-19 impact is mixed

Pharmaceutical industry, as a part of essential services has been operational during lockdown providing essential drugs and services in spite of logistics challenges and shortage of manpower and raw material. As per the management, Granules lost Rs. 60-70 crore revenue with EBDITA margin of 30% in march quarter due to logistics issues. Business operations in the last week of March were at 25% utilization and gradually resumed to 85% in April. Paracetamol restrictions were removed for PFI and FDs in the month of April and for API in may. In US markets, after increase in demand in March across all channels due to hoarding, the company witnessed slight reduction in the months of April and May. Thus, while there would be impact on June quarter numbers, Q2 FY21 would be in better shape.

Even with the current fluid situation, management has achieved its guidance of Rs. 300 crore bottom-line for FY20 and reiterated revenue and PAT CAGR targets for the next three years. The Covid situation in the next quarter will give a better picture.