Granules India Ltd

Stock Opportunities Untested - but worth a good look
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Questions for AGM -

  1. From where do they plan to get funds for acquisition.
    2.What size are they looking at for the company to be acquired
    3.What product mix are they looking at for acquisition… and how it will add synergy with regards to their focus on fdi, pfi, api.
  2. Any specific timeframes within which they plan to acquire.
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sure… will try and ask

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I was at the AGM today and here are my quick notes. I did try and do justice to the questions here and a few from my own but I must say, the general atmosphere was the usual entertainment show. With hoards of old shareholders, who have been sitting on a multibagger stock for years, it was all about trivial and complimenting each other types (there was a liberal dose of Telugu, Hindi and Urdu Quesions/compliments/people asking for more dividend/bonus shares for the silver jubilee next year etc, hold it in a bigger auditorium, give us a lunch etc). I went in early to catch the right folks but the all important gang arrived well after 4 PM and defeated my intent. I couldn’t stay back post AGM but in any case, the chairman was surrounded by the usual crowd.

  1. Actus (now called, the new API division) was turned around in Q4’14 but could not be sustained in Q1. There was a slight loss. Actus will take a couple of more quarters to breakeven. One can expect positive numbers from Q3 onwards. Actus API will be fully used in a year or year and half. The Actus products are complex & take time to build customer confidence and quality standards, for which the costs have doubled to maintain new quality standards
  2. The construction for a grand new API facility in Vizag has just commenced
  3. The Existing API, PFI are fully used. The new expanded capacity of 4000 T in PFI
    (Gagillapur FDA approved plant) will come in handy to augment the hitherto under-utilized FD capacity (50% capacity is still to be used). FD’s take time for approvals and registerations
  4. New molecule introduced - Abacavir an antiretroviral drug Contributed handsomely (I did not catch the exact number but if my memory serves me right, Mr. Krishna Prasad (KP) said that it was 14cr last qtr) This API was developed in-house by internal R&D team.
  5. New 4 to 5 APIs will be introduced in the current fiscal year and they expect each one of them to be a good, niche product that will serve them for the long term
  6. The Washington DC facility is being updated and all future ANDA filings will be through this plant
  7. A pipeline of 10 ANDAs filings in coming 2 years and atleast 2 before fiscal year end. Cost of filings are increasingly becoming expensive !! Much depends on taking out exhibit batches in the Washington facility.
  8. CRAMS JV with Omnichem - chugging along fine. The next big step is the USFDA approval of Vizag plant but that is a good 2, 2.5 years away
  9. With promoter’s chipping in with equity (1st tranche as per SEBI formula works to 84 change), there may not be any further immediate need for capital
  10. Co is moving away from selling to intermediaries for private labeling and going straight to customers (walmart was given as one example). ‘This cuts the middleman but also brings in its own challenges but the relationships are slowly getting forged and people are prepared to pay slight premium for our quality’
  11. Chinese Yuan devaluation won’t affect since the customers are well established a % here and there won’t make a difference to them, at the risk of quality. The Chinese JV (old Ibuprofen supplier of Granules) is doing fine. Imports from China will become a tad cheaper but will be a small portion in the grand scheme of things
  12. India share of 14% will pretty much same and the rest to export will remain the proportion
  13. OTC segment 50-55% share and the rest Rx share
  14. Acquisitions - continue to look for it
  15. Current debt of 500 cr (340 odd long term and the rest WC) will remain well serviced and there is no worry
  16. Harsha (his son) is taking care of US marketing. will try and attend more board meetings by VC
  17. There is great deal emphasis on having absolutely zero trouble with FDA. Taking queue from other Indian manufacturers (to his credit, KP said that much of the FDA raised issues are not as bad as it is made out to be in the media), Granules will be ultra careful, not to tarnish the spotless reputation, it has with its approved plant

All in all, I walked away with a feeling that this is going to be a steady firm. There may not be big surprises - positive or negative. The promoters have their skin in the game but they certainly will extract their pound of flesh (with Wife, Son, , Krishna Prasad has the whole family lined up in the board plus their daughter too was a prominent person in the AGM and I was told a big share holder. Given KP’s attractive compensation, he has all the incentive to make things happen but make no mistake - KP is the dynamic figure around which the entire company revolves. His son, looked a bid subdued to me but that is just after observing for an hour and it is too short to conclude. KP is dynamic, precise and has a ‘guy next door’ kind of straight answering style, inspires confidence). I walked away with the feeling that I will be here for the long haul, buy on dips and be there for the finish…
Disc - Invested. Views are extremely biased. Pl do your diligence and I am not a qualified analyst. I might have committed factual errors while reporting the above but it was not intentional. Please X check details before taking a stance on the above.

26 Likes
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Some tidbits I caught on the side - some from horse’s mouth, some from others around - who’s who

  • Focus will be on bottom line rather than top line
  • Actus basket will be the growth driver. 5 to 6 products can get you the kind of upside, where there will be years of tailwind
  • Abacavir will continue to be a long term potential drug
  • Omnichem will focus on intermediates manufacturing till the FDA approval arrives finally
  • 4 Crores is what it takes to file an ANDA (of course, it will be capitalized)…
1 Like
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Thanks ! Great Work ! The first tranche at 84 rs.Did you hear about the 2nd trance (the latest one ) for which they are now holding an egm on the 24th ?

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@KS16 great thanks for your feedback! I was very curious to understand leadership capabilities of his son.

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It is a simple SEBI formula @Reacher, as I understand. So, the record date is the key and some averaging is to be done - I think 30 days before. I need to understand the finer aspect here !! I am sure, the veterans here will know this to the last letter…pl add

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At what rate would the second, third tranche be placed and how would the market price come down to match it. Any inputs from seniors ?

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@suns It is unfair to compare a entity with another entity in my opinion. In fact, MOST track record in Indian Equity may have been better than Morgan Stanley for all we know :wink:

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FY16 would be another game changer for Granules after long consolidation which will reflect fruitful results from new JVs
Discl: Holding before splits

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@suns, the Motilas Oswal report which you are referring to dates back to Dec’14 and is already captured in this forum. Pls do not post MMB like messages here.

Pls don’t take it otherwise, its in everybody’s interest to maintain the quality of discussion for our mutual benefits. Pls refer to the Forum Guidelines pinned at the very beginning of the Forum page.

Rgds.

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Granules India Ltd has informed BSE that in connection with issue of warrants on preferential basis to promoters, as informed earlier, a Special Resolution has been passed by Shareholders of the Company at the 24th Annual General Meeting held on August 13, 2015 regarding issue of not exceeding 40,95,230 warrants on a preferential basis to promoter of the Company entitling the allottee of warrants, from time to time to apply for and obtain allotment of one equity share of the face value of Re. 1/- each fully paid up against each of such warrant at such price and on such terms and conditions as may be in accordance with applicable provisions of law including SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended thereof. The price has been worked out at Rs. 84.91/- per warrant. In this connection we would like to inform you that after receipt of subscription money being 25% of warrant price in accordance with SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, at a meeting of the Share Transfer and Stakeholders Relationship Committee of Board of Directors of the Company held today 40,95,230 warrants have been allotted on preferential basis to Mr. C. Krishna Prasad, Chairman and Managing Director and Promoter of the Company at a price of Rs. 84.91/- per warrant.

Fully paid-up equity shares of the face value of Re. 1/- each of the Company will be allotted on receipt of balance 75% warrant price on each warrant within eighteen months from 28th August, 2015.

As the Company has allotted warrants, there is no change in the Paid up share capital of the Company.

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Thanks for the above message. I have few questions/deductions made based on this and I would request your/member’s view:

  1. This warrants will lead to capital infusion to the company of about 35 crores in 4 tranches. Earlier we thought it would be to the tune of 200 crore. Why is this so low now? The remaining amount will come from QIP? So, company would still need to resort to debt/QIP for any acquisitions as there is not much cash on the books and with 500 crore of debt.

  2. Equity will be diluted at the end of 18 months or whenever/if the warrants are converted to stocks by about 2% (EPS to be lowered by 2%). Not significant. (4095230/~200000000)*100%

If 4095230 is 25% of the total warrants then my above calculations would have to be multiplied by 4 in which case the above 2 questions may not be relevant.

  1. How is this 84.91 arrived at? I do not know the calculation behind it, can any members please enlighten? Prima facie looks to be on the lower side. Is the promoter not confident of business prospects that he did not choose to have the warrant price close to CMP? The warrant price is almost 30% lower than the CMP.

  2. Interestingly, the interim dividend declared more or less equal to the 25% of the warrant money that promoter would have shelved now towards the company? Which in effect means, promoter took the money from the company in terms of dividend and ploughed back the same into the company in terms of warrants. Not sure what to make out of this? Any amber flags? So we should expect another round of interim dividend near to warrant conversion.

  3. Typically warrants issued at the time of issuing would be “out of money” and over the period of time the stock price will go up and promoter would exercise them (based on his confidence on the business prospects).
    ==> In this case, right away, the warrants are “in the money” by about 50% for the promoter. So, high chances that the warrants will be exercised but not happy about the conversion price at all.

  4. On the preferential warrants process per se it is unfair to minority shareholders that the promoters are effectively buying the stock at 30% lower than the CMP and that too by paying 25% upfront and the rest in the next 18 months and that too only if the stock price at that time is greater than strike price. So much flexibility to the promoters shortchanging minority shareholders in the disguise of providing capital to the company!

Please put forward your opinions.

Disc: Not invested so take my views accordingly.

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Point 4 was asked by many a shareholder in the AGM (but when it came to voting, there was still a majority which okayed it). Many shareholders were asking whether the same 30% off-paying only 25% feature will be applicable to minority holders as well ? The reply was ‘all these aspirations will be taken up at board level’ and that is where it quietly got closed out.
PS- invested

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@KS16 did any one ask about promoters’ extremely high compensation levels? In fact they could have taken dividend route which is more tax efficient too! I know minority can’t change that but i’m interested in their reactions.

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No one asked about the comp

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Price is not a choice or an option but a mandate and is decided by the SEBI rules which i have mentioned in my earlier post in this board . Promoters have no say in deciding this price except that they can influence the egm date - the effective date would be 30 days before the egm date .

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The price is governed under SEBI ICDR regulations as per which issue price to be decided by the management subject to voting and few other rules like lockin period, 25/75 rule, 18 months limit etc. Details can be found the Granules 2014-15 AR!

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One thing for sure that promoters’ are very market savvy. They timed their warrants when lots of exits by long term investors/PEs were happening. Two benefits, one they got it slightly cheaper and second it boosted investor confidence for short term.

Disc: invested but looking to exit at a better price.

1 Like
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Motilal Oswal initiating coverage on Granules India -

http://www.motilaloswal.com/Financial-Services/Research/Detailed-Report/Initiating-Coverage/13875