Granules India Ltd


(Amit) #593

Dr Vijay Malik raising red flags on Granules.

Disc: Invested


(Furkan Alam) #594

Very relevant points raised by Dr. Vijay Malik… this needs to be thought over and analyzed … i didnt know about the promoters getting this much salary… was an eye opener for me…

And the warrants and pledging was something always scary… good to see the detailed analysis done on that by Mr. Vijay…

WIll have to re-study this and maybe track the company more closely in the next quarters…

Disc: Invested


#595

Well, many points have been discussed here. I have myself raised promoter salary almost 2 yrs back. Dr. Malik has done a good analysis as usual but has missed few points.

Warrants: - If FIIs are so interested they can also buy it from the open market rather than in QIP. It could be that lack of institutional interest and related costs pushed promoter to raise funds through warrants. So promoters are fools to invest in perpetually negative FCF biz?

Poor returns and cash flow: I find it hard to find a pharma mid cap which gives free cash consistently as well as good growth opportunity. Nobody said it has perfect biz combination. Let’s think what could it become few yrs down the line. Base biz becomes cash cow and transitions to decent margin helped by OTC penetration. Agreed they do not have pricing power but there could be other reasons. If you go through the latest concall they say that they are not increasing API prices despite international prices rising fast. This is primarily due to long term agreements based on customer service rather than prices they charge.

I would rather focus on ROIIC which is improving incrementally. IMO, the path to FCF will be little lengthy but very certain. All investments in base biz will give them cash year after year due to their scale, serves basic necessity and regulatory compliance.

Coming to complex molecule which is critical for rerating: I feel they are right in going with alliances. That is how most of pharma biggies began in US. Their investments in JVs will start making money very soon which might transform P&L. by FY19. We should revisit Dr. Malik’s doubts at that time.

Disc: Invested


(rvetri) #596

FCF is not the all and only important. If a company invests into the CFO
into capex and not take it into FCF, it is perfectly OK. There is a red
flag only if the CFO becums negative…All the negatives mentioned are
known to me…And had decided to invest studying the risk reward carefully

Regards


(mp bajaj) #597

Dr Malik’s analysis is thorough but not enough forward looking.
Management needs appreciation that they are succeeding in value migration by various means which is their main theme in last 2-3 years. Raising EBIDITA & NPM is commendable. Auctus, Omnichem, Granules USA, OTC marketing on its own, Capacity increment in defined time span, good regulatory compliance in tough environment is commendable. Small cap investment always have a gray hue.


(Furkan Alam) #598

Warrants would have been fine if funded from his personal reserves rather than pledging shares and taking loans for the same. Thats a dangerous thing the promoters have been doing recently. The pledged percentage is now 28% of the promoters holding, which is quite significant.
Any issues with repaying principal and interest on these loans will lead to selling of these pledged shares, that’s where we need to watch out whether he keeps pledging more and more and gets himself in a trap. This is a serious concern. Needs to be tracked.

Also in the Q3 concall they mentioned a capex of 900 cr, out of which 650 cr needed for next year. So that would mean another bout of debt and equity dilution. I just hope they have the means to repay all this.

Yes it is true that if they manage to execute as they forecast, then after 2-3 years picture might change. But any issues down the line during this execution period can cause huge losses for minority shareholders.

That is the reason it needs to be tracked very closely.

Disc : Invested


(Rohit) #599

Wonderful write up by Vijay Malik. I don’t think there can be a more “accountant” view of looking at businesses than VM’s write up ;-).

  1. Agrees business in transformation from low value add commodity APIs to higher value FDs, growth impacted due to capacity constraint, needs to add capacity yet unhappy that capex funded by debt. (If they were already in higher value add FDs, their Fixed asset turnover, cashflow & profitability would have been higher to fund growth through internal accruals) This is probably where Torrent and a few others were 5-7 years back, while they were in the process of migrating from APIs to FDs.
  2. Warrants - Company needs funding to grow, promoter wants to double down and add more skin in the game, Dr VM’s recommendation - buy shares in the secondary market cause other shareholders will get a temporary spike in share price? If promoter buys in secondary market, how will Granules receive those funds? He makes it sound like the promoters pick and choose the timing and price of the warrants they acquire. There is a SEBI mandated formula on promoter warrant pricing.
  3. Inventory turnover & other operational metrics - He is missing out that, Granules is not using a distributor in the US any more & is directly marketing its products (resulting in higher margins) as a result of direct distribution Inventory will increase and other operational parameters such as turnover ratios, working capital etc. will optically look bad. If looked at from an accountants perspective this looks like the company is “deteriorating” operationally, if looked at from a business perspective the company (pending approvals) will get a bigger bang for its buck as there will not be any profit/revenue sharing with distributors.
  4. Promoter salary - This is a good point, the promoter family salary of nearly 15% of PAT does seem pretty high. But is this reason enough to pass up on a company on the crux of a transformation? This is a a red flag because?

(Lav) #600

If the promoters are using their own money (salary or savings) to increase stake, then that is a very good sign. But as pointed out by Vijay Malik, the promoters are funding their warrants purchase by raising loans by pledging their shareholding in the company. This warrants would not have been a big concern if the promoters were using their savings/salary to fund them. With such a high salary, i am sure they can fund a big part of the warrants through salary/savings but they don’t want to risk their salary/savings, instead they are risking their shares in the company, which is not in the interest of minority shareholders.

Its a red flag because, even when the company is in need of funds(warrants, debt, etc), the promoter is taking high salary. Again not in the interest of minority shareholders.

The basic conclusion that I draw from Vijay Malik’s analysis, is that the promoters are not minority shareholder friendly. They are mainly concerned about how they create wealth. If Granules executes its plans and the business shows great improvement, all will be rewarded. But if they are not able to execute the plans, the minority shareholders will suffer but the promoters will still create wealth for themselves.

I agree that Granules is on the cusp of a transformation in the coming few years, but the only issue is that with such management practices (not friendly to minority shareholders), how much can you trust them and how much of your money are you willing to allocate to Granules in your portfolio? It all boils down to risk vs reward.

Another way to look at this is that if there were no issues with pledging to fund warrants and promoters were drawing average salary (industry standard), then the investment in Granules would be less risky and you could allocate a sizable portion of your portfolio to Granules and be handsomely rewarded in future when the story plays out.

DISCLOSURE: Invested but questioning my position in this company.


(ricky76) #601

Your logic makes no sense.

A big part of an entrepreneurs wealth lies in his company, pledging shares to put more funds in the company is a sign of conviction in the business.

The average warrant strike price is in the 90rs range, a level any retail investor could have got in over the past 2 years.

Would you rather the management had sold shares through a placement to FIIs at a highly dilutive share price?

I tend to get more worried about the likes of MPS and Ashiana who opportunistically fund their expansion through other people’s money.


(rvetri) #602

Good discussion…But keep your calm guys…It is looking to get a little
acrimonious…But enjoying the pros and cons of Dr Malliks notes. Thanks to
him…we seem to be learning better…


(pradip) #603

Ricky, on your comment about pledging shares, would suggest you to read through the latest interesting developments in Treehouse.


(ajay81) #604

IFC to make $47.5 mn debt investment in Granules India


(us121) #605

In addition to ease of getting debt this should also be a source of low interest loan, i beliieve.
any further input on this matter?


(mrai74) #606

IFC proposed to finance with debt of $68.5 million, including a corporate loan of up to $47.5 million for IFC’s own account and the rest through equity and internal accruals,

IFC had first made a debt and equity investment in the firm in 2007, followed by a Cleaner Production Lending Facility loan in 2009 and a debt investment in 2011 meant for expansion in capacity.

IFC invests $47.5 mn. in Granules India


(Sunday) #607

News on further pledging.
http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=6357981


(Amit) #608

(Anandh) #609

A more transparent way for the company to receive funds immediately is preferential allotments where there is an upfront 100% cash receipt, instead of warrants where the promoter gets an upto 18month call option by paying just 25%. To note, SEBI priicng formula does not reprice the conversion price at allotment.

Secondly, like the blind men of Hindustan, lets recognize that each of us has different perspectives, and that an accountants view is no less or more valid than that of a businessman. So let not critique the writeup merely because you feel it is numbers driven. A good book to appreciate both perspectives is Damodaran’s book 'Narratives & Numbers"


(amolk) #612

Promoters have pledged 28.13% of their shares in Granules India. Approximately 3 crore shares. Assuming promoters received 50% of total pledged share value …it would be 1.5 cr * 90 Rs per share = 135 Cr.
Even with such high salary of 16 cr per year, it will take years to pay back 135 cr and release the shares.


(sanjay agarwal) #613

plus dividend every quarter which may increase going forward from current 0.30 every quarter


#614

You all are assuming he has no other biz. They have profitable winery too.