What stands out,is the management’s assurance that the OP margins are sustainable.This means another year of scorching PAT growth with revenues growing anywhere between 25-30%(on a conservative basis) The stock is available at just about 8.5X TTM.I believe it should be trading anywhere between 375-400 in the near future.Yes,there are some risks…especially the high-debt but with the overall risk appetite of the markets increasing & Infra names,etc. rallying 40-50% on hope alone,why should Granules languish at single-digit multiples?!
Such sustainable,strong earnings trajectory needs to be rewarded with better valuations.
The results look great again. The best part is that both sales and EBITDA margin continue to increase. Management has said that utilization will further improve, which would be great. I think the stock will see a tremondous rerating by the time EBITDA margin reaches above 20%. Its subsidiaries are at minor loss, which should change once Actus pharma scales up the business in regulated markets. Unfortunately, there’s no update on the Ajimoto Omnichem JV, hope we see some good news very soon.
I believe Granules should show EPS of ‘atleast’ 55 in next year and the current valuation of 5.5. forward PE is dirt cheap.
The new investor presentation gives lot of details about the products, pipelines, market shares etc. Good to see management making consious efforts to reach out to investors to increase transparency. I think they are poised for good growth in next 3 years. significantly over time. The current result is impacted by increased depreciation and interest expense due to Actus aquistion. The management seems very confident about turning around the company and make it profitable within 1st year .
Current D/E of 1.2 is a dampener and a cause of concern, buthopefully theyshould be able to reduce it over time.
Promoter pledging has increased from 4.16% for fy13 to 12.17% for fy14.Along with that D/E has also increased from 1-1.2.My previous experience has taught me that when the markets aredoing well everything is hunky dory but when markets correct considerably these stocks are punished severely by the market.I am not discouraging or encouraging but asking to excercise caution in these kind of counters and probably this is the reason why it’s quoating at such a low p/e.
Rajarshi, there’s clear reason why both the D/E and pledging has increased- aquisition of Actus pharma. But the interest coverage ratio for last quarter is 7+, which I think is comfortable. I do not intend to compare this with some high quality high margin debt free companies, those are different class altogether and trade at 20+ PE with 25-30% expected EPS growth rate. Granules on the other hand is value stock with good short term (EPS) growth potential. Stock returns are subject to markets. In a good market, it has potential of great returns but as you said, it can correct significantly from its 'top’in amarket crash.
Rajarshi,certainly your concerns are valid.But I don’t think we need to view the high debt in bad light.I say this because Auctus does seem like a good acquisition & should add value for shareholders in the future.Moreover,the co. has done various actions to show that it is moving in the right direction.Low P/e may probably be due to the low analyst coverage,low liquidity & other such factors…and some re-rating HAS happened over the past year.MArkets are seldom concerned about debt-levels.Look at what Ceat/Auro Pharma have returned in the last 12 months.ONce markets make sure that EBITDA margins are sustainable(As management said in its press release),then some more re-rating can take place.In any case,the business seems well poised to grow 20-25% further in FY15,and as Gaurav has stated,EPS should be north of 50 for this fiscal year.Thus,if negatives are already priced in,why worry too much about them?
The company has around Rs. 440 crore debt. For a company with Rs. 1000 crore sales, comfortably growing at 25% per annum and expected to make 25 crore per quarter net-profit next fy, this number seems ok. Key things to monitor are that it doesn’t take anymore debt and the Auctus buy turns around in a year or two.
Considering that the rerating for this counter has happened from arond 300-498 levels Option 1: would it be wise to book profits and invest in steady compounders like Ajanta or Shilpa?
Option 2: Wait for the next 2 quarters and see how the auctus acquisition plus debt reduction works out and then decide the course of action.
I would go with the 2nd alternative.Especially,since Promoters are picking up shares from Open Market…its always a good sign.And compared to its peers,valuations are still very cheap.If EBITDA margins continue the trend,and the Auctus acquisition pays off(management seems very confident on that front,too) we could be looking at 15x easily for Granules.
Disc.: Had a trading position,but keeping it as investment for the time being.
Yes Sagar market has reacted to the management’s confidence that Auctus would start showing profits which in turn would result in higher EBIDTA…Also I would monitor the debt scenario…It should not increase from here…Management has said that they would bring down the D/E to less than 1 in 2 yrs… So debt would probably be constant for this FY.
With auctus continuing to show losses how does one approach this counter? Prices had run up to 700 and is now correcting due to average results…does one book the profits and invest in other counters
According to managment commentary this quarter and previous quarter, Auctus is not expected to be turned around till the later half of the year. Even then, it would be breakeven at net profit level or minor profit. So one should not expect any significant changes on that front or even from the Omnichem front in this year. Both will be 2-3 year kind of stories. There was a 10 day closure of PFI facility in this quarter and same could happen in next quarter. but despite that, it posted EPS of 11. Management has guided 20% + sales growth with stable to slightly higher margins. To me , Fy 15 EPS of 50-55 does not look difficult ( similar at standaone and consolidated level). At current price its trading at 11-12 FY15 earnings, which I would categorize as cheap for a pharma company coming out of pure commodity business ( margins being the indicator) and slated to show impresssive growth in next few years.
Exactly Gaurav.The last time we had this discussion(after Q4),the stock was trading at 310-320 levels.In 1 quarter,it has already doubled from there!
The triggers are firmly in place,& yet to play out.May it be the Omnichem JV,Auctus turnaround,approvals for Auctus’ filings,improving product mix(towards PFI) & better return ratios.However,the stock has generated decent insttl. interest over the past quarter(reflected in the higher FII holding) & thus,has gotten re-rated.The management sounds very candid,& professional.The 10 day shutdown was a planned shutdown,so no worries there…in Q2,we may see better topline.Margins continue to improve steadily…2-3 years down the line,we maybe looking at near 25% EBITDA.In case markets discount that much ahead of schedule,we can ponder over an exit.In a normal world,I don’t see how a 50%+ PAT growth can be termed ‘average’(until & unless you trade at Astral’s valuations or live in the Dot-com bubble era :D)
The report provides lot of details about the company, explains the business in terms of segments, geographies, various business units as well as individual molecules. The level of transparency has been indeed increased drastically.
They havent indicated any immidiate trigger for significant growth for this year. However 20%+ as indicated by management in Concall should be achievable due to low base effectas the capacity was increasing over last year and close to full only in Q4. Again, the best part is increasing margins and future potential from Auctus/Omnichem.
The consolidated numbers include performance from the Auctus Pharma Division which contributed revenue ofRs.25.1 crore and a loss before interest, depreciation and tax ofRs.3.40 crore
GIL reported good nos. in Q2.The Street seems to have taken the slow sales growth,negatively.However,as Management explained,the Vizag cyclone played its part & they continue to stick to their guidance for FY15.The management also guided for margins from Auctus coming to the same level as that of Granules by Fy16.Emkay estimates FY16 EPS at 71.I think the consensus ranges from 65-72.
After a decent time & price correction,GIL seems attractive again.The day I entered GIL,it was trading at 9x TTM,today it is trading somewhere near 10x forward! Given that most Pharma cos. estimated to grow at GIL’s pace,trade north of 20x forward…the valuations look very attractive to me.Even adjusted for the higher Debt here,the stock could easily re-rate to 15x,offering a good 50% upside from CMP.
Listening to the Concalls,I like the management & the way they are gearing up for the long-term.Constantly moving up the value chain over the next few years is a priority & they are ramping up R&D for it.Now,these are ‘intagibles’ which will take time to materialise.However,even on current earnings I like the stock.
The impact of cyclone is on Auctus and results for the same will show in Dec quarter, as cyclone fell mid october. But management mentioned that its fully insured and the impact will only be in lost sales. Again, they reiterated that Actus will still show good growth and breakeven at net level for the entire year. So they must be expecting Q4 to have bulk of Actus’s sales.
Concall Positives
Growth to be between 15-20% for the year, which isnt huge, but they mentioned that they have been a bit defensive in taking orders this year.
Positives
Standalone business is doing well with improving margins. Closer to 20% margins, there isnt a reason it should be considered commodity business anymore. Actus products seem to have some market (but i am no way an expert here) based onInvestor presentation shared by management on the website. Also, R&D has developed a product and expect more in near future. If management can reduce the debt, it will start getting valuations similar to some other pharma companies.
Negatives
Real results for Omnichem JV will start from Fy17 and will achive peak sales by 2020, which is only Rs 550 crore. Granules has 50% stake, so i think it will be small part of the business even in 2020 if Granules has to grow 20% CAGR from here. Hence it is pretty much a hype and we should expect any great triggerscoming from Omnichem.
Actus : Lot is being done for Actus products. US subsidiary / More Inventory / More Credit / Investments. I dont think its a red flag, but enough to bother me about whether they are doing too much to make it a business even after buying it relatively costlier.
Disclosure: Invested from low levels. No plan to add/reduce.
Revs. up 13%; OPM up 127 bps; PAT up 9%;
EBITDA margins up 127bps to 17.3%
Auctus’ EBITDA loss= 1.2cr.,for 9M it stands at 13cr.
PFI contribution has risen to 42% now,API contribution continues to decline.Management targets 65% of revs. from PFIs in the coming 2-3 years,with API falling to 20%.So,EBITDA margins should move towards 20%,
The numbers are in-line with what management had indicated,& a bit better than what I was expecting.Management has re-iterated that Auctus will break even in Q4.I believe EBITDA margins should be around 15% for Auctus in FY16.The new PFI facility has got delayed by 2 months,due to late receival of equipments.Production loss was 3 weeks,due to Vizag situation.QIP will be used for Capex alone,LT loans will be repaid through internal accruals.Growth will be aided by better utilisation in the short-medium term.
All in all,once Q4 is out of the way…things should take off from FY16.EPS for FY15 maybe in the vicinity of 46-48.Next fiscal,EPS should move to north of 60.FY17 will also be good.The management seems to be thinking big now,after their experience in the manufacturing space.My sense is,we can see the company move up the value chain quiet steadily in the coming years.R&D spends are also slated to rise ‘steeply’.Company will file 7 ANDAs in the coming 12-18 months,revenue contribution will happen only from FY17/18.
Stock may spend some more time in this price range,split news may keep the volumes buzzing for some weeks though.I stay bullish in the long term & GIL is one of my top holdings.
