Buy Granules India: AnandRathi Institutional Research

Granules India - Healthy margins; Buy with a target price of Rs 166

We are positive about Granules, India, considering the better margin and return ratios. We retain our Buy on the stock with a revised target of Rs. 166. Its reported Q3 FY16 results were better than we expected on the operating margin, helped by its focus on operational efficiency and rationalisation of the Auctus subsidiary, though revenue growth disappointed.

Moderate quarter. Granules India's Q3 FY16 revenue grew just 7.8% yoy, to Rs. 3.4bn (vs our estimated Rs. 3.9bn) due to product rationalisation and lower realisation. The EBITDA margin improved 255bps yoy, to 19.6%, helped by the higher gross margin (on lower input costs) and a favourable product mix. The better margins led to Adj. PAT growing 15.2% yoy to Rs. 272m, however below our estimated Rs. 310m due to lower revenue and a higher tax rate. Auctus reported revenue of Rs. 310m.

Traction to continue. Segment-wise, APIs, formulations and PFIs brought, respectively, 40%, 33% and 27% to revenue. The PFI division reported robust, ~32.3% yoy, revenue growth, followed by 4.6% yoy growth in formulations; however, the API business declined 11% yoy. Molecule-wise Paracetamol, Metformin and Ibuprofen brought, respectively, 38%, 24% and 21% to revenue during Q3 FY16. Area-wise, regulated markets (the US, Canada and the EU) contributed 59% to revenue, growing 9.7% yoy.

Change in estimates. We tweak our FY16, FY17 and FY18 estimates: revenue by ~7% (due to lower sales of the Auctus subsidiary and less-than-expected revenue in 9mFY16) and adjusted PAT, respectively, by 8.2%, 9.1% and 9.6% (on account of lower revenue and a higher tax rate).

Valuations. The stock trades at 16.7x FY17e and 12.5x FY18e earnings. We maintain a Buy, with a revised price target of Rs. 166 (earlier Rs. 183) based on 18x FY18e earnings. Risks. Currency fluctuations, regulatory hurdles.

Shares of GRANULES INDIA LTD. was last trading in BSE at Rs.116.4 as compared to the previous close of Rs. 113.15. The total number of shares traded during the day was 206629 in over 2455 trades.

The stock hit an intraday high of Rs. 117.25 and intraday low of 112.2. The net turnover during the day was Rs. 23994472.

Source : Equity Bulls

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