GRANULES INDIA has posted strong operational performance in Q1FY21. Here I am trying to do a simple back of the envelop calculation to check valuation of the stock.
As per management guidance, they can maintain the current growth rate of 30% earnings growth and ~ 23% EBIDTA margins. The Capex was guided for next two years only (350 – 400 cr this year and 300 cr next year). As per concall remarks by Mr Chigurupati, they would match the capex to maintain the current growth rate. So, following are the estimates based on available information :-
| Year | Revenue | PAT | PAT margin |
|---|---|---|---|
| FY20 | 2599.0 | 335.0 | 12.89% |
| FY21E | 3118.8 | 405.4 | 13% |
| FY22E | 3898.5 | 506.8 | 13% |
Assumptions :
Growth 20% for FY21 and 25% for FY22
PAT @ 13%
So, with PAT of 500 cr (FY22E), expected market cap at 20 times would 10,000 Cr
Current market cap 6759 Cr. So it seems fairly valued at present.
One of the questions bothering me was the nature of its products – the base molecules (para, metf, ibu, metacarbo, guifen) are very basic / generic in nature and does not require any particular process / chemistry skills to manufacture them. This question was asked in the concall and Mr Chigurupati has answered that it is the vertical integration, unique way of manufacturing and regulatory compliance that has helped them constantly increase market share. As I understand, they play with their strength in manufacturing – high volume, low cost – translating into better economies of scale. (Ref : Concall Transcript page 14)
Other triggers and positive developments :
- At present, 11% revenue is contributed by GPI (USA) - expected to quadruple the same in next 3 years
- Focusing on limited no of new filings - 7 to 9 per year for next few years
- Entire Capex will be from internal accruals only
- Capex includes new MUPS (multi-particulate sustained relese products) block. Now, the company’s base molecules do not require this new technology.
- The products that will be manufactured in MUPS block would be a little complex products with relatively higher margin like omeprozole, metoprolol etc.
- They are also looking at new molecules like losartan, centrizine, fexofenadine etc. to increase the product basket
- However, as per the company, on a long term basis (3-5 yrs), the 5 base molecules would still continue to contribute ~ 75% of revenues (presently ~ 85%), rest being from newly launched products.
Disc : Invested and biased.