Granules India Ltd

Malkd · February 4, 2021, 5:10am

I think the past 2 days have been a good lesson regards holding good businesses rather than holding stocks. Selling due to technical/short term reasons almost never makes sense when investing in a good business. In the short term selling and buying could be due to any number of reasons including Noise traders/RSI overbought or oversold etc. The main questions that should be asked and monitored are

Do you trust the promoters:
Imo Krishna Prasad has been a fantastic promoter and apart from maybe being too overexcited about his business prospects during the covid period he hasn’t really put a foot wrong. The succession issues seem sorted now considering he has laid out a plan uptil FY 24 or so and his daughter is now on board. Their numbers all look real and balance sheet looks clean.
Has capital been allocated correctly?
The products they launch and the capex directed for the same has led to healthy returns on their capital employed and stayed respectable even through the downturn last few years. Infact they were one of the few companies that handled the downturn well
Their moat:
Management has repeatedly said that they should be looked at as a manufacturing company and that’s playing out via their operating margins. They’ve slowly but surely improved over the past few years and finally they are above 25 percent and look sustainable. Dependability on China will reduce in a few years too so expect less volatility in margins.
Long term plan:
There was not much visibility regards this earlier. However, now we know about MUPS and their capex until FY 24. We also know that they are experimenting with crams which leaves the door open to it in a few years if they desperately need a new source of growth(which they don’t need right now)

If the above factors break down over a couple of quarters and not due to short term one off reasons ie promoters integrity/operating margins collapse/bad capital allocation/Long term plan turns for the worse/Regulatory issues prop up and granules fail/… then maybe selling makes sense.
However, for now the overall bull market has spoilt us. Getting a business with 25 or so percent PAT increase YoY for the next couple of years with improving financial metrics and a long term plan with a history of good execution under ethical promoters in a sector with tailwinds is a goldmine

Disc: invested at various levels and added more during the dip around 320 too. My 3rd major pharma holding after Laurus and Alembic. Not a sebi advisor

paragbharambe · February 4, 2021, 9:45am

Very well put @Malkd.
I think the price should not influence an investor to think/doubt about the business- I know it is easier said than done.

The higher price shall not make us comfortable, but lower price shall not create panic and raise doubt. But that is exactly what happens when the price we pay fall by 20-30%. Daniel Kahneman has said the pain of loss is 2.5 times more than gain from the stock. So if someone has bought the stock and it come down 20%, it is very difficult to hold it, particularly if one does not have a high conviction.

In term of price, if I take Jan 2020- it was trading around 100-120 range. At the top, it has reached around 400. Even if it fall 50% from the top, it has still given handsome returns of more than 100, which is respectable. So one to have patience.

I know the management is excited about incoming opportunities, which is great. The only thing I am bit concerned is management giving high guidance and raising the investor community’s expectation. May they needed to do it as a bargaining chip for PE sell-out, but no one know. Even three years back, they said they will grow PAT at 25 CAGR for the next 3-4 years, but PAT fall in FY18 due to high oil prices/raw material. They have successfully managed to pass on higher raw material prices. But with due respect, they have come back with a vengeance by delivering exceptional results and exceptional abilities to execute their massive capacity expansion in the last two years.

Even now, the capacities they are putting have high ROCE. In the last con call, they said the new capacities would return their investment in 2/3 years, which is great.

Due to the nature of the business, Granules needs constant capacities to increase to keep growing. Earlier (in last decade) most of these capacities are funded by debt or equity dilution. However, this is now changing. They are funding all their CAPEX from internal accrual. I am not too worried about debt as lot of it foreign debt with the cost is around 4-5%, which is great for the company.

So overall, the company is on great footing. However, how the market catches fancy is anyone’s guess. But fundamentally the best is yet to come in my view.

Note- Invested and views are biased.

sham72942 · February 4, 2021, 3:59pm

To conclude the discussion that I started, I wasn’t fearing the 20% drop but that, did we miss anything?
We collectively agree we haven’t, yet
And yet is a very strong word because anything could happen & I believe this community would come up with red flags if any, other than dark intentions as I pointed out about Meghmani.

Conversely neither should we assume that sab changa si, just because of the recent run-up, we shall & we will actively look into the management, promoters & the business performance to safeguard our interest.

ganesh_bastwadkar · February 6, 2021, 5:44am

Example of How the interest of PE firms give returns .

paragbharambe · February 6, 2021, 9:21am

Two three years back, Granules did expansion and increased capacities of paracetamol, Metaphormin. They used to say that they have also invested in Oncology blocks. If you see the last 2 to 3 years con call, they were very optimistic about Oncology block. Since the last few quarters, they started calling that as a Multi API block, changing the narrative.

Question to fellow members:
1- Does anyone know what is the capacity utilisation of that new block is? I believe it started commercial production sometime in Q1-FY21. If that is the case, it’s operating leverage could come into picture in FY22, when it will get its validations through and start providing material to developed countries?

2- In Q3 call, Management said they have 15 products approval from GPI (US Unit), but they have launched only five products. Any idea wh 10 products are yet to launch?
I can understand that some of the approval they might have got in a few months back. But ten yet to launch products, are they reevaluating product potential? Any idea/comments?

Soumyadeep_Majumdar · February 6, 2021, 2:22pm

My opinions on the second question

Quoting Priyanka from the latest concall in response to a question

And GPI, we have about 16 approved, out of which we have about 8 to 9 launched. The remaining will be launched shortly

My understanding from the earlier part of the concall is that they are building enough inventory to last them atleast a quarter. Quoting Priyanka again from the latest concall

We launched about 4 products in the U.S. this past quarter, and intentionally, delayed the launch of 4 other products to ensure we build enough inventory ahead of the launch. We will be launching some of these products in Q4 FY '21.*

paragbharambe · February 7, 2021, 8:32am

I fully agree @sham72942 . In fact as an investor we focus too much attention on bright spot and future painted by company management and it is very easy to get lost in management charm. I think we shall keep an eye on read flag and encourage other to raise it.

In term of Granules, I am wary of second comments on this thread (dated July 2012-reposting it here just to re emphasize)

And response given to it.

Malkd · February 7, 2021, 9:14am

@paragbharambe
While I agree that we should keep an eye out and not trust promoters words fully I don’t think it’s fair to compare granules with the companies on that list from those sectors just because they are from Hyderabad.
You could also say that all those issues that lead to scams and scandals would’ve led to even more scrutiny on numbers laid out by companies from Hyderabad and made it more difficult for manipulation over the past decade since.

Again, we can’t turn a blind eye on promoters but speculating regards reasons for them being untrustworthy doesn’t work either.
If red flags do come up then we cant ignore them but we can’t live in fear expecting them to come up when everything looks clean based on their history and as of today apart from a bit of over enthusiasm during a tough period and a failed PE bid.
There is always a risk with any company, and riffing off of rumsfeld(though he dint exactly mean this), it’s better to concentrate on the known knowns(past history/financials/future plans etc) and the known unknowns (crashing API prices, usfda inspection failures etc) than worry about the unknown unknowns(cheating etc) until its in danger of falling in the previous 2 categories.

At the end of the day in the comments you referenced the people who understood the company, did due diligence on the promoters, and studied the balance sheet and growth story got a 30 bagger and the people who were worried about Hyderabad didn’t.

Note: this is in response solely to the Hyderabad comment. Regards your 2 questions soumyadeeps answer is nail on the head. Priyanka confirmed exactly that in the recent concall. Regards query 1 more studying will be needed and changing of narratives is something that does indeed need further evaluation

Disc: Invested so may be biased. Not a sebi advisor

paragbharambe · February 7, 2021, 9:52am

Although we can cannot stereotypes particular class/city base on certain things, this is rule of thump (like PE ratio) some people use and it has worked for this. I am personally not ruling out anything particularly if something does not agree to what views/opinion.

The same statement can be looked at positively. People have maintained this thread for more than 8 years, but nothing significant has reported.

My two cents here is there won’t an red flag as such appearing at once. Before company comes up a red flags, there are few/many small things that leads to the eventual red flag. So one has to look for small things too.

During last 8 years, Granules has fallen 40-50 % from top many times. Not many people could withstand so much drop in their stock price and remain invested. Having said, that I agree to overall points that long term investing has paid out for Granules.

My views are biased too as I am invested. The intention of my above post was not to come harsh on people personally who are voicing negative views, but try to address or look at the point objectively. Having said that I am invested and biased but I am quote open to disconfirmatory evidence.

Malkd · February 7, 2021, 10:07am

Haha I am the same. I am as paranoid as anyone else when it comes to my investments and Promoter integrity is key for me.
For me there were a couple of red flags but I’ve gone through them and accepted them as false flags

The recent switch in narrative regards growth numbers from management put me a bit on edge. Gone through everything I possibly could have again and tbh the only thing I’ve got out of it is bad risk assessment. Post Q1 in the interview on Bloomberg Mr. Krishna prasad clearly states Q1 was just a base and every quarter would be better this year. Now Q4 is at risk of being worse or at par to Q1 based on recent concall. So clearly either he got too excited or dint foresee problems linked to covid(and if your supply chain is linked internationally surely he should’ve realised there could be issues). Maybe they’ve learnt their lesson and are just underpromising now though. He even mentioned how they are not too dependant on China apart from a KSM and that came back to bite them. Considering covid was a one off and noone could predict anything il let that pass… they’ve learnt from this and now plan on reducing dependence further over 1.5 years.
The PE deal breaking down: I can’t comment on the PE deal since management never confirmed or denied it in any communication so I don’t know who decided to end interest there either. The role of priyanka of late makes it seem that granules has a succession plan now so doubt this will be an issue again and worries/thrills regards a PE exit are now gone post last concall anyway.
Lack of long term plans. I honestly did not know what they planned post FY 22/FY 23 up until the latest concall. It was all just so hazy. They’ve cleared that up in the latest concall though
Overall, I’m satisfied.

Will go through the communication of management regards oncology to multi API and see if I can pick anything. Encouraging others to do the same too and do report any red flags they do find them. My aim isn’t to stop discussion regards red flags but to allow the process of compounding to take its course since I’m trying to be one of those investors who continued buying at the 40/50 percent dips and stayed the course long term

Disc: invested.

Patrioticindian · February 9, 2021, 5:22am

Granules India to invest ₹800 cr. in expansion

Expansion Plans, PE rumours and long term plan all very clear.

paragbharambe · February 9, 2021, 7:25am

Importance of Integration and FD

Management has been consistently saying that Granules is doing more and more integration. Found this commentary from Laurus lab in FY17 thanks to @Worldlywiseinvestors , which is highlighting the importance of integration. Although the comments is for Laurus, it is equally relevant for Granules because they also moved towards vertical integration at the same time, in different API.

As Granules is launching more API and ANDA, even if they are 4 or 5th player in the (US)market, they will be still be able to garner market share from other player by being the lowest (or one of the lowest cost) producer of the API. This also auger well for as it increase margin on overall basis, aiding ROCE.

ganesh_bastwadkar · February 9, 2021, 5:49pm

Granules will be in the F&O list from this month 25.02.2021.

mrai74 · February 9, 2021, 6:13pm

Rafi_Syed · February 10, 2021, 10:45am

Granules India Research Report .pdf (659.3 KB)

12years · February 11, 2021, 6:28am

Attached is a BSE news for Granules having an Analyst/Investor meet with 3 MF houses : Aditya Birla, HDFC, ICICI.

Would like to know what is the general purpose of such meetings, what gets discussed and if you are an investor is there a way to know what was discussed between the management and the fund house ?

Rafi_Syed · February 17, 2021, 2:47pm

There is nothing much to read from such meetings, these are general meetings to understand more about the business and all, usually they release a report (keep an eye on Trendlyne site for the free reports ) . If there any meetings with PE firms etc… then it is interesting to watch. Again as individual investor it is very hard to get that kind of info.

paragbharambe · February 17, 2021, 2:48pm

Granules India Limited announces approval of Potassium Chloride ER Capsules USP

https://www.bseindia.com/xml-data/corpfiling/AttachLive/5c6a77c8-c8b4-47d0-a565-fa4298d22317.pdf

Rafi_Syed · February 17, 2021, 2:53pm

Granules India Limited announced today that the US Food & Drug Administration (US FDA) has approved its Abbreviated New Drug Application (ANDA) for Potassium Chloride Extended-Release Capsules USP, 8 mEq (600 mg) and 10 mEq (750 mg). It is bioequivalent to the reference listed drug product (RLD), Micro-K Extended-Release Capsules, 8 mEq and 10 mEq, of Nesher Pharmaceuticals (USA) LLC. The product would be manufactured at our Hyderabad facility and is expected to be launched shortly.

Usage :
What is Micro K used for?
This medication is a mineral supplement used to treat or prevent low amounts of potassium in the blood. A normal level of potassium in the blood is important. Potassium helps your cells, kidneys, heart, muscles, and nerves work properly.

mrai74 · February 18, 2021, 2:14pm