Story unfolding on expected lines
Vizag-based facility under JV with Omnichem receives EIR
n Granules India’s (GRAN) Vizag facility was inspected by the US FDA in Dec-16, post which it was issued seven 483 observations. This is a new facility, and currently the JV is manufacturing pre-APIs from this facility. EIR will clear the road for the JV to reach out to innovators to supply APIs. We expect GRAN to make APIs in 2HFY19E from this plant (~12-15 months will be required for making exhibit batches and site transfers). This would lead to margin inflection (from ~21% now to ~30% by 2HFY19E).
* Granules-Omnichem JV – a potential cash cow: This is a 50:50 JV between GRAN and Ajinomoto’s subsidiary Omnichem. Omnichem would be transferring largescale production of intermediates and APIs to the JV. It will also provide full support for quality, engineering, tech transfer, procurement, sales and management-related matters. FY17 was the first full year of operation for this JV. This JV manufactures pre-APIs of four products. Sales stood at ~INR2b in FY17, with EBITDA margin of ~22% and PAT margin of ~12%. We expect this JV to record revenue of ~INR4.5b, with EBITDA margin of>30% in FY20E.
* Base business – augmented capacity to fuel growth; focus on formulations to boost margins: Currently, API is running at 100% capacity and PFI at 75-80% utilization. The company had planned to increase its API capacity by ~40% and PFI capacity by >20% (expansion plan to get over in FY18), which will help fuel growth in formulations (as GRAN is dependent on backward integration). This will help grow the base business at mid-to-high teens until at least FY20 (~27% CAGR over FY17-20E v/s ~7% in FY17).
* US business – plans niche foray into Rx business: GRAN plans to file ~25 ANDAs in the US by FY19E. Of this, ~12-15 complex ANDAs will be filed from its US-based Virginia facility and rest from the India facility in Gagilapur. The company has already filed two complex generic ANDAs from its Virginia facility in March/April-17 (mkt. size of USD500m). Of these, in 1 product, GRAN could be the only generic player in the near term (TAD of Jan-18).
* PAT CAGR of >30% till FY20E despite full R&D expensing: We expect ~35% PAT CAGR over FY17-20E. This is after assuming R&D expense of USD12m. This strong growth will be driven primarily by ramp-up of the base business (led by capacity expansion), shift in product mix, Omnichem JV, and OTC business expansion. Although FY19E will be the first year of US business sales, the full impact of investments in the US business will be visible from FY20E.
* Stock trading at ~11x FY19E PER; US business ramp-up an option value: GRAN trades at ~11x FY19E EPS (despite assuming >10% equity dilution). We believe the stock has the potential to deliver >50% return in the next 12-18 months on the back of multiple re rating (to >18x forward earnings) and strong EPS CAGR of ~30% till FY20E. At 18x FY19E PER, fair value of GRAN’s stock is INR200.
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