Granules India Ltd

Stock Opportunities Untested - but worth a good look
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Folks,

Thread is being closed temporarily - to de-clutter this thread, remove ALL non-value-additive posts/reports/comments.

@aveekmitra - thanks for your repeated attempts to advise folks on the right way forward. and bringing attention here.

All interested - Please bear with us for a few days - till we do the needful

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I am re-opening the thread. Please use your judgement and take forward the discussion which add value to all members.

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Granules India Ltd has informed BSE regarding a press release titled “Granules India’s clarification on market rumors brought to our notice by few Shareholders”. Date: 06 Sep 2016

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/63821D2C_DA55_4B32_AF01_5197FF8C021F_100501.pdf

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The information i have from one of my friends is that the singapore based firm which had written the report has now formally written to the company that they indeed were NOT referring to granules and also tendering an apology.To me this shows the complete honesty of the company in not just taking the matter to the logical conclusion but also lays bare the machinations of the so called bears . The way the price fell also makes it crystal clear to me that the promoters are 100% above board and transparent . If it had been another lala company they would have taken the help of some market operator to manipulate the price.

I shall share the letter as soon as I get access of it.

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I think some FIIs are selling/trimming which is causing this volatility. Another sentiment dampener is frequent pledging/release updates. The last thing is that Q2 will be soft as per Q1 concall so makes sense for short termers to exit.

disc: Holding

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Further clarification recieved from granules yesterday in continuation to the earlier clarification.

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I am invested here, but not clear about next 2 years growth. Even though i understand that Mgmt is trying various things (OTC, RX, In licensing and Marketing,Complex ANDA, CRAMS ) to boost growth in longer term. But it seems Traction will be seen only in Fy19/20 and that too if it succeeds. So Lot of uncertainty and near term pain.

My Earnings estimates are 6.5 , 7.6 and 9.6 for Fy17, Fy18, FY19 resulting in around 17% bottomline growth for next 2 years and aorund 28% growth for Fy19.
gRAN_FY.xlsx (8.8 KB)

Granules Business prospects

  • OTC Business - Currently negligible % of Revenue and can see traction from say Fy19 and meaningful revenue form Fy20/21
  • Prescription (Rx) Business - 2 ANDAS approved by US and a abacavir molecule. ANDA pipeline as of today is very minimal and no approval is expected till Fy18. Even here traction can be seen around FY19 as Andas are expected to be filed from US virginia facility and Auctus
  • DMF for Partners - Example multiple sclerosis - Patent expiry is around FY20, SO commercial launch should be around fy20/21.
  • FD Capacity utilization - Currently only 50% is utilised, so huge opportunity, but finding new customers does not seem to be easy.
  • CAPEX - Always in capex mode, SO investment led story only . Now going into lot of new areas OTC , RX R &D , filing Andas, so Capex will only increase, so no free cash flow expected in near future and uncertainty also
  • Auctus - Real growth will be seen two to three years from today by Fy19. Only in reserach and filing mode now. As of ow no profit, no loss
  • omnichem - Only intermediates till Fy18. Expected usfda filing and api approval by Fy18/19.
  • biocause - No growth here. Will remain zombie. Just for APi security
  • Inlicensing( Windlas and par pharma)** - Visibility can be seen only in Fy18 end /Fy19 . Hope this US marketing is for otc and not for RX as they rely on third parties to market even their own RX Anda’s. Not sure how they will eb able to market Windlas assets.
  • API - Lot of capcity addition in metformin, so could see traction from Fy18. But formulations based on that will again be 2 years from Fy18.
  • PFI - Capaciy addition planned and ven current capcity utilization is 80%. So should give 15% topline here evey year
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The story of Granules India is in transformational stage, no doubt, but the real benefit (if at all) would start to flow in only after 2 years (i.e. from FY 19 onwards).Going by Management commentary it is clear now that they would be in high investment mode in coming 2 years (including current one). So, instead of analysing it on quarterly basis , it has to be analysed with minimum 3 years time frame. If at all an investment hypothesis is to be developed in Granules India, it has to be made by keeping FY 20 in mind. Any investment hypothesis with shorter time frame may not work here.

So, I am considering a base case of Rs. 3000 cr estimated Revenue in FY 20, with a profit margin of around 14-15%. At 15%, it would give an estimated profit of around Rs.450 cr. Now, any one can derive estimated Market Cap by applying whatever P/E he expects ( I would not like to speculate on P/E at this point of time).

So, as an Investor I am constantly trying to challenge my own investment hypothesis and try to answer the following questions?

(a) Can they achieve Rs. 3000 cr sales by FY 20

As regards as Revenue is concerned, I think going by their track record , they should be able to comfortably achieve 20% CAGR in 4 Years (majority of growth expected back loaded) . Following points should support this assumption:
• Aggressive capacity expansion plan for base line (core) products i.e. Metformin ( by 7000 ton)
Paracteamol (by 5000 ton) Guaifenesin ,(by 2000 tons) and so for other products also .
• Filing of ANDAs (including from Auctus)is expected to gather momentum ,
• Incremental Sales from OTC segment (to retail giants)
• Scale up of Omnichem JV (CRAMS)
• Revenue from at least 1 product from 4 products in licensed from USpharma – Windlas

(b) Can they command 14- 15% net margin by FY 20?

The story of Granules so far has been that of expanding EBITDA margin (from around 12% in FY 11 to 19% in FY 16) primarily due to operating leverage and rising contribution in sales from high margin Finished Dosage business (from 0% in FY 08 to 34% in FY 16) and the same trend is expected to continue in future also. Margin in OTC segment, CRAMS and marketing of in licensed product is expected to be higher.

I am not considering the upside if any of the 4 Products comes up with limited exclusivity.

Key Risks / Concerns:

(a) Any negative news on FDA front(or any other regulatory authority in other countries): Probability: Low (due to B2B Nature, past track record) Impact : Higher (>60% business in regulated markets)

(b) Pricing pressure due to declining raw material prices (as witnessed in recent quarters). This is a high probable event due to absence of niche products presently.

© Very High Compensation to Promoter Group plus increase in their salary surpassing their business growth. I am still breaking my head as to how to treat this. Would request Seniors to help me on this.

(d) Other interest of promoters, I think it is ignorable so far business delivers

(e) Impact of currency fluctuations. (will require more work )

(f) Constant rumour on corporate governance issues.

(g) If they resort to further acquisitive growth , it will come up with its own challenges (including integration, goodwill issues)

(h) Debt levels although in comfort zone now, has to be key monitorable

Disclaimer: Invested >10% of PF and constantly reviewing the assumptions

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With all thse I feel it doesn’t make sense to hold and wait till 2020.
But exit now and reenter in 2018
Disc:invested

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Granules India gets USFDA approval

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Granules India’s Gagillapur facility successfully completed US FDA inspection http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/70BC4C48_744C_45D7_A586_9E8863DBDD22_081824.pdf

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Birla Sun Life has completely exited Granules in September according to Economic Times.

Disclosure: Invested

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We are on right path with good result and dividend

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Hearing out the Management in the concall today reaffirmed my view that Granules is a FY 20 story and not earlier than that. Not going down to specific numbers, key take aways (Other participants may correct if I have erred somewhere):

  1. Topline growth slowed due to capacity constraints , pricing pressure (profit not impacted as price of raw material also fell). Expects better 2nd Half.
  2. Higher Margin due to better product mix & captive consumption of some APIs
  3. FD now 37% of sales, PF & API at 26% & 37% respectively
  4. Capex at Rs. 314 cr and Rs.300 cr (approx) in FY 17 & FY 18 respectively
  5. By FY 18 should have pipe line of 15 ANDAs out of which 6 should be complex
  6. Pledging solely for warrant funding and to continue for sometime.
  7. Slow and Steady Growth in OTC, no separate capex needed for OTC as of now
  8. Commercialisation of inlicensed products expected in FY 19
  9. Expect new businesses (which all will be FDs) to be 30% to 40% of revenue in next 3 to 4 years
  10. In the long term , target FD mix around 65%
  11. Dominant position in Core business remains, not after market share since it may entail pricing pressure beyond a point, hence drive for other businesses.

So my view is that the basic trend of bottom line growth outpacing revenue growth continues , Capital intensive nature of business is also expected to continue, very difficult for them to generate meaningful free cash flow in next few years. So, one has to take a call on Management execution & integrity and if convinced has to be patient.

Discl: Invested & constantly reviewing my assumptions.

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I’ve a couple of questions for you.

Should the following things be a concern?

  1. Inventory buildup of Rs.18 Cr.
  2. (Consolidated)Trade Receivables as on Sep 30, 2016 is 379.36 Cr vs 154.93 Cr on Sep 30, 2015.

Disclosure: Invested.

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receivable build up is due to change in accounting. earlier they used to consolidate accounts of JVs so receivables from associates used to cancel out but now you see the absolute number.

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In addition to what @sumi00 said, receivables are actually down by 30 crores compared to last year (if we use old accounting process).

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Granules seems to be on right track. Obviously, there seems to be some pain (lower revenue growth) for next couple of years as the company builds base to get into the next league.

Real kicker is going to be in FY19-FY20 IF company executes well as per the plan. Needless to say if that happens then shareholders will be handsomely rewarded.

Thing that I like is even with stagnant revenue growth, profit is growing at good pace because of margin expansion. I believe management said they can maintain margins around current levels. (please let me know if I misunderstood)

For those who attended today’s earnings call,
@KUNJ Can you confirm if the 10-15% revenue growth guided by management in second half of FY17 is on standalone or consolidated basis? Also, did they indicate 10-15% growth for next two quarters or for complete FY17? I missed that part.

Disclosure : Invested and have significant allocation to Granules in my portfolio.

Regards,
Nilesh

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As regards Increase in Trade Receivables is concerned, I think they clarified that the same was due to new treatment accorded to Bill discounted with Banks under IND AS. I understand that earlier in case of Bills discounting , the amount was reduced from Debtors and was shown as Contingent Liability. Now under IND AS, in case of bill discounting with recourse, one can’t derecognise Debtors . They further clarified that actually under old treatement the Receivables actually went down by around Rs. 30 cr.

I don’t have info on reason behind 'Change in Inventory 'of around Rs.18 cr, hence can’t comment on the same.

Thanks