>Granules India Ltd.

Trebling of Finished dosage capacity from 6 bn to 18 bn doses will boost top line
Granules has added two new lines at the existing Gagillapur factory which will treble its finished dosage capacity from 6 bn doses to 18 bn doses in June’2012. Company expects production from Q2FY13 which will increase top line substantially going forward. Finished dosage division contributed `90 mn in FY09 to the company’s top line. This share has increased from 3.5% in FY09 to 25% in FY11 and now it stands at 33% (`185 mn) in FY12. With the newer capacities coming on stream we expect the share from this division to increase to more than 50% of the total revenues in next couple of years. Company has also received two abbreviated new drug applications (ANDA) approval which will help them to participate in the US formulation market.


Entered CRAMs business by forming JV with Ajinomoto OmniChem
Granules India entered the CRAMs business by forming a 50:50 JV with Ajinomoto OmniChem in July’2011.Company also set up a greenfield facility in the Pharmacity SEZ, Vishakhapatnam in November 2011 for this new initiative and commercial production commenced from Q4FY12. This will help company to enter new therapeutic sectors like cardiovascular, central nervous system and oncology. This new entity will boost company’s profitability in the coming years by delivering value through unique contract manufacturing platform by leveraging granules technological capabilities and efficient processes and OmniChem’s extensive product portfolio and existing customers.


Operational Excellence projects has enabled company to increase API capacities
Granules has completed operational excellence projects in last one year which has enabled them to increase the API capacities. Through this company has increased its Metformin API capacity by 35% and Guaifenesin API capacity by 55%. API division contributes 32% to its total revenues in FY12. These expanded capacities will boost company’s profitability going forward. Company has grown two times to that of the industry growth in last 5 years Granules India has grown its top line at a CAGR of 28% which is two times the industry growth rate of 14% in last five years. In FY12, company’s top line grew 38% to `6.53 bn. With new capacities coming on stream and a favorable product mix, top line will further accelerate in the years to come.


Valuations
Granules India is trading at a PE multiple of 7.5x its FY12 EPS of `14.87. On price to Book value, company is trading at 0.9x its FY12 book value of `122 per share. Company looks fairly attractive at this level due to 1. Strong growth in top line due to capacity expansion in various divisions, 2. Entry into CRAMs business will help company to enter therapeutic sectors like cardiovascular, central nervous system and oncology. We recommend a BUY rating on the stock with a target price of `133 which is 9x it FY12 EPS. The key risks for the company are 1.significantly lower capacity utilization in each of the divisions will impact company’s profitability and 2. Company has grown more than double the industry growth rate in last five years, any slowdown in the growth rate will re-rate the valuation multiple.


RISH TRADER