One reason could be the FII selling - FIIs hold more than 26% and some of them might be exiting though you will come to know about it only when the next SHP is released. In general it is futile to guess the short term price movement and the reasons behind it. So either you remain invested as long as the thesis behind your investment is intact or put a mental stop loss trigger price at which you simply sell and move on.
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The main reason to invest in granules is not because itās a great companyā¦ it definitely isnāt one right nowā¦ invest in it if you can see it becoming one in the future.
Companies that command high valuations are companies that can generate a heck of a lot FCF and grow with it and still give money to their shareholders. Granules is no where close to being in that position yet. Great companies belong to sectors that have a history of huge wealth generationā¦ Pharma is coming out of a multi year period of poor returns and it will take a while for people to accept that it is really indeed back and wonāt go back to poor returns and hence why the pharma sector as a whole(not just granules) is struggling to beat its all time high. So 2 things need to happenā¦
- the entire pharma sector needs to be re rated and
- Granules needs to be re rated.
Both these wonāt happen overnight.
Firstly, It will take a couple of quarters more of good results(and not just commentary) for the broader market to accept that pharma is back and that we are at the bottom of the cycle and not the top. We are already seeing the usfda coming back, api pricing pressures and supply chain issues etcā¦ so old wounds are being dredged up.
If you firmly believe pharma is back and wonāt go through a multiyear struggle again (I do) ā¦ then investing here makes sense. Else booking profit/loss makes sense
Secondly, even if pharma is back as a whole granules needs to reach a point of getting a genuine re rating(and not a market frenzy re rating)ā¦ for this they need to prove their growth is sustainable ie they can continue walking the talk and growing 20 to 25 percent per year. At some point in the future they need to be less reliant on debt to grow and be able to offer some sort of SSGR. The plan for this is laid outā¦ growth of 25 percent or so next few years aided by higher sustainable margins, less dependance on China etc(which has caused the supply chain issues thay could be the cause for this drop), less core product dependance, MUPS and then Capex uptil FY25.
All of this could theoretically lead to a huge increase in base profits and hopefully generate a lot of FCF for granules by FY26 or so which would send them on the ideal High valuation SSGR path.
If you see this happening in the future and are able to handle the inevitable short term obstacles along the way then it makes sense to invest. If notā¦ then booking Profit/loss makes sense.
Right now all of those things are set to happen in the futureā¦ most of those havenāt happened yet.
As investors are job is to track the pharma cycle and ensure it really is on an uptrend and ensure the problems of the last decade donāt come back in againā¦ AND to track granules and ensure they manage to keep their plan on track and that it slowly and surely improves YoY and turns into a great company from a good company.
Only then will huge price rises etc be warranted. The jump from 100 or so to 300+ rerated and priced in what granules is today. If you are pricing it based on what we see it becoming 5 years from now then it is indeed cheap but you need to wait for that time period for the story to play out and benefitā¦ and at current valuations the negatives of the story getting put on hold etc are priced in.
In short, I wouldnāt pay 500 rs. For a share of granules at this momentā¦ so Im not expecting the market to either.
However, I would be willing to pay even a 1500+ per share in FY26 if they pull off all of the above and hence why Iām happy investing at cmp.
Disc: invested. Please flag if inappropriate. Speaking of flags Iāve been searching desperately for red flags and Iāve not been able to find any apart from the ones Iāve mentioned in previous posts. There were some minor(yellow?) Flags mentioned in this now very outdated article from a few years ago by dr vijay Mallik which may not be relevant today but those of you interested can have a look: Granules India Ltd: Fundamental Analysis - Dr Vijay Malik
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Hi Malcolm,
We have to also focus on what can go wrong, we may not know of any accounting malpractices, but we can try to focus on what can go wrong. They are investing in capex upto 2025, what happens if the market/margins for that molecule collapse and you are burdened with huge interest costs, Most research analysts in the concall never ask anything about the long term vision, they are just focused on the next quarter , By their own admission they are more of a manufacturing unit, rather than a research based pharma company. Can they maintain these margins when you are competing with Chinese who may have hidden subsidies.So one has to keep patience and see if the margins are sustainable over a few quarters. What iam trying to say is one cannot linearly interpolate with the capex spends.
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Exactly. If margins collapse, overall market collapses, if their new products donāt gain traction, they donāt grow fast enough to pay off their interest etc then the whole story falls apart. Hence why I wouldnāt be willing to pay much higher than cmp either and why the current valuations make sense.
And hence why paying due diligence to every quarter result/concall etc is important. A LOT could go wrong and hence the low valuations giving some sort of MOS since it could all go according to plan too.
One thing Iāve learnt from this is do not invest in a lumpsum no matter how amazing a small cap story sounds or how cheap a company is. My only wish is that Iād changed my strategy and invested in 5 tranches over 5 years as the story improved instead of all 5 tranches over the past year while the story barely had any time to gain traction but the stock price looked like it was running away.
Again, please delete if inappropriate. Not a sebi advisor
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The management has already told all the future expansions will be through internal accruals not debt. Though their present debt is easily servicable as it is around 600crs (which too is low cost).Compared with many other pharma boasting backward integration with api , Granules is better placed with the experienced management in APIās and scale of api which can only make more competitive.The near term is mainly supply chain issue which is not going to last forever.Management also feels this is opportune time to grow the business not to exit, next 4 to 5 yrs will decide the future direction of the company which depends solely on their execution.My thesis of investing is their scale and backward integration not very much on their margins as they are not a crams/cdmo pharma itās just a low cost mfg co.
Disc: Invested and biased.
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Granules India Limited announces approval of Acetaminophen, Aspirin and Caffeine Tablets (OTC), generic equivalent of Excedrin Migraine Tablets of GlaxoSmithKline Consumer Healthcare
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For the last few days, I have been going through the con-call in 2020 & 2019. I have captured some notes about the business. I have split these notes into various segments based on my conveyance like R&D, Multiple API Unit, MUPS, which management is talking about.
The idea is to see how management is talking about the business over a period of time. I have captured screenshots of what management from con call transcripts in their own words and tried to look through different lenses.
As I have taken these notes for myself, I have scribbled on these notes. Please excuse me for scribble as some of the handwriting might not be readable. However, I intend to focus on what management is saying so please focus on the screenshot and ignore my scribble.
I am finding these notes helpful as there are based on what management is saying. I hope others will find it helpful too. Please let me know if is helpful. If they are not, I will delete it from here.
I have uploaded the file on google drive as it is big.
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Helpful. Thanks. What is your conclusion?
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The intention of the document is to provide facts about what management said in the last 4/5 con call.
IMO, following things are key drivers for coming years.
1- Vaizag Unit 5 capacity utilisation. Non Onco block shall reach optimum capacity utilisation in FY22.
2- Onco Block- I am not sure how Onco will plan out. Looks like the company setup a plant and offered to sale products to one of the client, but the client did not take it so they marked it down in Q3. So it is interesting to see how Oncol utilisations pan out.
3- MUPS based product will aid margin improvements in Q4 of FY22 onwards.
4- Genome Value Capex- As it is Greenfield capex- it is long way. They will start construction it in FY22, but it will take another 2-3 (FY24 onwards) years before meaningful contribution (Build plant-> validation-Approvals from regulatory agencies) before selling final products to clients.
Note- I am invested in the company so views are biased.
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Granules has been primarily a manufacturing company. So far there is nothing great as far as R&D is concerned. But they are getting more and more focussed on R&D. Over the years they have upgraded themselves gradually from APIs to finished tablets, and now moving up the value chain in finished dosages. They are filing new ANDAs , own labels, OTCs etc. And generally they have done very well in maintaining and improving profitability. They have kept out of regulatory trouble by strict process control and transparency in record keeping. These are all attributes of a good and successful company. They appear to be trying to become a Dr Reddy or Aurobindo but presently it looks far off. It is however a persistent company. I am invested.
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thanks for some really good analysis on Granules. any views on why the stock has been under pressure - havent seen anything particularly negative in recent few weeks. new about promoter looking to sell (news from nov-2020) is a potential concern creating pressure on stock?
I too am perplexed by the recent fall in the price of Granules, and as you mentioned, unable to find any information regarding the current downtrend. Promoters seem to continuously deny talks of any stake sale. Better to wait and ensure that you have a good Margin of Safety.
Cheers!
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I may be bit contrarian here but I think earlier price rise was due to stake sale rumors. Investors were enthused that Granules would be bought by bulge bracket PE like Carlyle, KKR etc and then they can push it on much higher growth path like some recent PE acquisitions of Sequent Scientific or JB Chemicals. When promoters strongly denied any chance of selling out, stock price normalized to the levels prior to when rumors and price rise started.
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How it will impact margins needs to be seen
The promoters are doing a great job and stake sale wouldnāt have triggered something that the management was lacking.
The recent price move is impacted by:
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RM and container costs shooting up ā¦although pass thru will happen, the impact of the portion absorbed by granules and the impact on subsequent quarters will need to be watched.
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MFs continue to see large redemptions due to covid/ retail investors preferring to invest directly/ poor returns by many MFs.
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