BP Equities_Granules India Ltd_Initiating Coverage_BUY_Trgt 179_27th Apr 2016

Stepping Strategic Ladder April 2016

Granules India Ltd. Initiating Coverage

Institutional Research BP Equities Pvt. Limited (www.bpwealth.com) 27/04/2016

B P W E A L T H

Table of Content

Summary on Business Profile & Explanation on why we like this company…………………...….………….....3&4 Investment Rationale……………………………………...…………………...…………………………………………...5-10

Capacity addition coupled with higher utilization level to propel revenue …………………….………………….5-6 ⇒ API capacity addition

⇒ PFI capacity addition

⇒ Paracetamol

⇒ Guaifenesin

⇒ Metformin

Creating long-term value addition through JVs/acquisitions………………...……..…...…………………………..7-8 ⇒ Auctus Acquisition– Long term value creation

⇒ OmniChem JV gives entry into high margin CRAMS business

US Market—CMO contracts and new product launches to drive future growth ..…...………………......…..…….9 Strong balance sheet with healthy return ratios and margins .……..…………...……...……….…………….........10 Company Background ..…………………...……………………………………………………………….……...……..11-12 Key Milestone & Management Team …….……………………..….…………………...…...…….…….….......……......13 Peer Comparison, Key Concerns & PE Band ………………………………………...…………………………….…....14 Valuation & Outlook …………………………………………………………………………………………………..… ..….15 Financial Statements…...……………………………………………………………………….....................................16-19 Disclaimer……………………………………………………………………………………………………..………...………20

2nd Feb , CY11

Granules India Ltd

Share Holding Pattern (%)

Sector Outlook Positive

CMP (Rs) 132

Target Price (Rs) 179

BSE code 532482

NSE Symbol GRANULES

Bloomberg GRAN IN

Reuters GRAN.BO

Key Data

Nifty 7,962

52 Week H/L (Rs) 164 / 75

O/s Shares (mn) 216

Market Cap (Bn) 28

Average volume

3 months 1,401,260

6 months 1,380,700

1 year 2,124,190

Stock

Face Value (Rs) 1

Relative Price Chart

Company Overview

Granules India Limited (GIL) is a Hyderabad based company established in 1984 by Mr. C. Krishna Prasad having four USFDA approved facilities in and around Hyderabad and one in China. GIL’s base business (~88% of total turnover) is mainly from five molecules – Paracetamol, Metformin, Ibuprofen, Guaifenesin and Methacarbamol. The base business has shown a robust CAGR of ~26% to Rs12.1bn in FY15 over past 5 years. The strong growth has been on account of volume expansion as well as increase in prices. GIL supplies these 5 molecules in the form of API, Pharmaceutical formulation inter-mediates (PFI) or Formulation depending on requirement of customers. Largely an export-oriented company (around 80% of revenues), Granules exports to more than 300 customers in 60 countries. The company derives 63% of its revenues from regulated markets of North America (32%) and EU (31%) and balance from LATAM (11%), ROW (10%) and India (16%).

Investment Rationale

Capacity addition coupled with higher utilization level to propel revenue

GIL is one of the largest producers of APIs in key product categories, and is among the global leader in Ibuprofen, Paracetamol, Metformin, Guaifenesin and Methocarbamol. GIL has expanded its product offerings to 19 molecules post Actus acquisition. The company plans to expand its API capacity to 31,860 TPA from current capacity of 22,760 TPA by FY18. We expect capacity utilization to remain at high levels ( 88% in FY17, 90% in FY18 and 96% in FY19) on the back of growing captive needs of the formulation business. Post the introduction of additional capacity in PFI of 4,000TPA in FY16, GIL has delivered 24% growth in 9MFY16 with 70% capacity utilization levels. We believe the enhanced PFI capacity of 18,400MTPA would be enough to support 17-18% CAGR over FY17-19E.

Creating long-term value addition through JVs/acquisitions

GIL’s strategy is to obtain cost leadership in manufacturing of API’s for quality conscious customers and thereafter shifting them to formulations in a phased manner. In line with this, GIL will bank on the same assured API supply from Auctus to file ANDA’s for some of the molecules. The acquisition will thus be a continuation of GIL’s existing business model and will add new molecules to a validated busi-ness strategy. Auctus 22 regulatory filings include 8 European filings, 4 USDMF’s, 3 South Korean DMF’s, 3 IDL China, 2 Health Canada, 1 Italy and 1 Spain. We expect the company to enhance its revenues with these additional offerings to its existing and new customers. We foresee Auctus revenue grow at 23% CAGR over FY15 to FY19E. Under the joint venture [JV] (50:50) with Ajinomoto Om-niChem (OmniChem), a facility is being set up at Vizag SEZ to manufacture high-value APIs for Om-niChem existing customers. Until site gets approval , the JV will manufacture intermediates and supply it to Omnichem's Belgium plant where they will be converted into API’s. At present, this business con-tributes Rs.250mn to overall GIL’s sales. However, after attaining the required regulatory approvals for products, Omnichem’s JV sales are expected to reach a peak of Rs.5.5bn by FY20E. We believe once site gets approval this JV will start supplying high value API’s (Oncology, CVS, etc) to direct Innovators which we believe will help the company to achieve 25%+ EBITDA margin.

US Business- CMO contracts and new product launches to drive future growth

In FY15, GIL reported revenue of Rs.4,200mn from finished products, contributing 32% of total reve-nue. Around 50% of formulation business was driven by CMO contracts given to global innovators and large generic players. The remaining 50% of the business came from the sale of own products in regu-lated markets like the US and the EU. Currently, GIL has four product approvals for the US market namely Paracetamol, Ibuprofen, Metformin and Neproxin. The molecule Metformin contributes biggest part in formulation business. During FY16 company has filled 1 ANDA and expected to file 5-7 ANDA’s in FY17 and same for the next two years. We expect formulation sales to pick up from FY19, with 7-8 more approvals for OTC/Rx products. We also believe, going forward, the mix would further improve in favor of formulation business i.e from 32% in FY15 to 48% in FY19E as it carries higher margin (~25%) overall EBITDA margin to enhance from 16% in FY15 to ~22% in FY19E.

Pharmaceutical 27th April, 2016

Buy

BUY HOLD SELL

> 15% -5% to 15% < -5%

Stock Rating

Research Analyst Nikhil Shetty [email protected] 022-61596409

B P W E A L T H

3

51.2%

6.4%

1.2%

41.3%

Promoter FII DII Others

50

75

100

125

150

175

Apr-15 Jul-15 Oct-15 Jan-16 Apr-16Granules India Ltd Nifty



B P W E A L T H

Strong balance sheet with healthy return ratios and margins

RoCE and RoE have witnessed gradual improvement from 11% and 9% respectively in FY07 to 13% and 22%, respectively, in FY15. Going forward, we expect return ratios to witness a steady improve-ment with ramping up of the recently commissioned capacities and steady improvement in margins in next two years on the back of increasing contribution from high growth & high margin finished dosage business and higher operating leverage from Auctus and Omnichem. We believe increased asset sweating and margin expansion will translate into higher return ratios in the medium term. GIL plan to incur capex of Rs.4.5bn over FY16-18 for ramping up its existing and future capacity as well as to invest in medium-term R&D and manufacturing projects. The capex would be funded through convertible war-rant issued to promoters (Rs.2.1bn) and reaming (Rs. 2.5bn) though internal accruals. Currently, GIL has Rs. 3.9bn of debt on its book. We expect it to repay Rs.1,600 mn debt over FY17-19, resulting in comfortable Net D/E ratio of -0.1x by 19E from 0.8x in FY15.

Why we like this stock & valuation methodology

During FY10-15, GIL’s sales has grown at a CAGR of 23% with 44% PAT growth. For the next three years i.e. FY16-19E we expect the company’s sales to grow by 20% and PAT by 33%. We expect com-pany’s EBITDA margins to improve 16.1% in FY15 to 22% in FY19E, on the back of operational effi-ciency, moving up the value chain towards high margin business, improved capacity utilization & capi-talizing Auctus Pharma’s portfolio. We believe GIL’s strategy of entering into long term supply agree-ments with global pharma companies helps it in safeguarding its margins.

At the CMP of Rs 132, the stock is trading at 18x/14x/10x of our FY17E/F18E/FY19E expected earnings respectively. However, the stock has run up in the past, we believe the valuations are attractive and the stock can give decent returns in the future. We initiate coverage on the stock & recommend ‘BUY’ rat-ing by assigning 14x to its FY19E earning (after factoring ~5% dilution from warrants). We arrive at a target price of Rs 179 (potential upside of 36% from CMP) for an investment horizon of 12-18 months.

4

Conversion of issued war-rants to promoter group to result in equity dilution of ~5% in FY17

Source: Company, BP Equities Research

Key Financials (Consolidated) YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E Net Sales 10,959 12,929 14,331 16,839 20,157 24,571 Sales Growth (Y-oY) 43.4% 18.0% 10.8% 17.5% 19.7% 21.9% EBIDTA 1,583 2,086 2,829 3,445 4,162 5,393 EBIDTA Growth (Y-o-Y) 86.2% 31.8% 35.6% 21.8% 20.8% 29.6% Net Profit 752 909 1,252 1,638 2,121 2,924 Net Profit Growth (Y-o-Y) 131.0% 20.8% 37.7% 30.8% 29.5% 37.9% Diluted EPS 3.7 4.5 5.8 7.2 9.3 12.8 Diluted EPS Growth (Y-o-Y) 129.2% 20.0% 29.8% 24.2% 29.5% 37.9% No of Diluted shares (mn) 203 204 217 228 228 228

Key Ratios EBIDTA (%) 14.4% 16.1% 19.7% 20.5% 20.6% 21.9% NPM (%) 6.9% 7.0% 8.7% 9.7% 10.5% 11.9% RoE (%) 23.9% 23.1% 23.2% 21.1% 21.3% 23.6% RoCE (%) 19.0% 18.2% 21.9% 22.7% 24.6% 28.9% Tax Rate % 33.0% 29.0% 33.0% 33.0% 33.0% 33.0% Book Value Per share (Rs.) 17.6 21.1 29.9 39.5 47.8 60.7

Valuation Ratios P/E (x) 35.6x 29.7x 22.9x 18.4x 14.2x 10.3x EV/EBITDA 19.3x 14.7x 10.9x 9.1x 7.3x 5.3x P/BV (x) 7.5x 6.3x 4.4x 3.3x 2.8x 2.2x Market Cap. / Sales (x) 2.4x 2.1x 2.0x 1.8x 1.5x 1.2x



B P W E A L T H

Investment Rationale

Capacity addition coupled with higher utilization level to give major push in revenue GIL is one of the largest producers of APIs in key product categories, with an installed capacity of 22,760 TPA for APIs, and is a global leader in Ibuprofen, Paracetamol, Metformin, Guaifenesin and Methocarbamol.

⇒ API capacity addition

The API capacity has increased at CAGR of 22% during FY11-15 to 22,760 TPA. The production has increased at higher rate of 37% over similar period. And its revenue has increased at 34% CAGR dur-ing FY11-15 to Rs 5.7bn by the end of FY15. GIL is one of the largest producers of APIs in key prod-uct categories and is a global leader in Ibuprofen, Paracetamol, Metformin, Guaifenesin and Methocar-bamol. GIL has expanded its product offerings to 19 molecules post the acquisition of Actus. Despite being in a commoditized business, GIL grew its API business at a CAGR of 29% over FY11-16E while maintaining profitability and remaining price-competitive due to continuous improvements in manufac-turing processes and economics of scale. The company plans to expand its API capacity to 31,860 TPA from current capacity of 22,760 TPA by FY18. We expect capacity utilization to remain at high levels ( 88% in FY17, 90% in FY18 and 96% in FY19) on the back of growing captive needs of the formulation business.

⇒ PFI capacity addition

Pharmaceutical formulation intermediates (PFIs) fall between APIs and finished dosages. Global Pharma companies benefit from the use of PFs since they result in considerable time and cost saving. Post the introduction of additional capacity in PFI of 4,000TPA in FY16, GIL has delivered 24% growth in 9MFY16 with 70% capacity utilization levels. We believe the enhanced capacity of 18,400TPA would only be enough to support 17-18% CAGR over FY17-19E. We expect GIL would need to add further capacity post FY19 to support growth going forward.

5

API Capacity (TPA)



PFI Capacity (TPA) FD Capacity (bn Tablets)

Revenue to grow at 20% CAGR over FY16-19E

8.4 8

14 14

18 18 18 18 18

55%

90%

54%

71%

56%

65%

75%

85%

95%

0%

20%

40%

60%

80%

100%

0

2

4

6

8

10

12

14

16

18

20

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

Thou

sand

s

Capacity in TPA Utilization level %(RHS)

6 6 18 18 18 18 18 18

18

33%

57%

21%

32%35%

40%

47%

55%

65%

0%

10%

20%

30%

40%

50%

60%

70%

0

4

8

12

16

20


Capacity in bn Utilization level %(RHS)

3%

38%

17%

43%

18%

11%

18%20%

22%

0%

10%

20%

30%

40%

50%

0

5,000

10,000

15,000

20,000

25,000

30,000


Revenue (In mn) Growth rate % (RHS)

10.4

18 18 20 23 26

32 32 32

58%

78%

98% 100%94%

100% 88%

90%

96%

0%

20%

40%

60%

80%

100%

120%

0

10

20

30

40


Thou

sand

s

Capacity in TPA Utilization level %(RHS)



B P W E A L T H

Capacity addition in Met-formin API will end the de-pendence of third party sourcing

⇒ Paracetamol

Currently, there are very few players with approved Paracetamol API capacities to sell in regulated markets. GIL is the second-largest player in this category and has expanded capacity to 18,000TPA in FY16. However, increased Paracetamol API capacities are likely to be used more for captive con-sumption (formulations) and for other CMOs.

⇒ Guaifenesin

GIL is one of the few global companies that supply Guaifenesin and Metformin. The company has increased its Guaifenesin capacities from 640TPA to 1,200TPA in FY15 and plans to add another 2,000TPA which is expected to get commissioned by Q3FY17.

⇒ Metformin

GIL is increasing its Metformin API capacity from 2,000TPA to 9,000TPA in two phases. First phase of 3,600TPA to get commissioned in Q3FY17 and once company sees demand visibility than they will add remaining 3,400TPA. Currently the company is utilizing 4500TPA of Metformin API out of which 2,000TPA is from in house capacity and rest 2500TPA from third party. The company sells 97% of its Metformin API in PFI and FD form. Only 3% of Metformin API is sold to a single strategic customer. With the capacity addition in Metformin API it will end the dependence of third party sourcing and fur-ther it will improve margin as its in-house sourcing would cost less. The Metformin market is currently growing at 8-10% per year, reflecting healthy demand for Metformin molecules due to combination products.

6

FY16 Q3FY17

14400

18000

0

4000

8000

12000

16000

20000

FY15 FY16E

1200

3200

0

600

1200

1800

2400

3000

3600

2015 Q3FY17


Capacity addition to make it self sufficient

Paracetamol Capacity (TPA) Guaifenesin Capacity (TPA)


4500

2000

2500

Requirement In house capacity Sourcing from outside

3,600tpa additionMetformin Capacity

4500

5500

Metformin Capacity



B P W E A L T H

Creating long-term value addition through JVs/acquisitions

In recent times granules has scaled up its top line. It now intends to improve profitability through some of the JV’s and acquisitions it has made. The company also seeks to mitigate concentration risk on select products. These initiatives are expected to assist the company to achieve its objectives.

⇒ Auctus Acquisition– Long term value creation

GIL’s strategy is to obtain cost leadership in manufacturing of API’s for quality conscious customers and thereafter shifting them to formulations in a phased manner. In line with this, GIL will bank on the same assured API supply from Auctus to file ANDAs for some of the molecules. The acquisition will thus be a continuation of GIL’s existing business model and will merely add new molecules to a vali-dated business strategy. With the acquisition of Auctus in February’14, the company has added 12 new APIs to its product offerings. These products have a potential market size of $37bn (Rs2,220bn) as shown in the following table:

Auctus API’s cater to therapeutic areas such as Antihistamine, Antihypertensive, Platelet aggregation inhibitor, Analgesic, Systemic Antifungal, Anti-ulcerative, Neuropathic Pain Agent, Anti-infective, Antivi-ral. The Company’s 22 regulatory filings include 8 European filings, 4 USDMFs, 3 South Korean DMFs, 3 IDL China, 2 Health Canada, 1 in Italy and 1 in Spain. We expect the company to enhance its revenues with these additional offerings to its existing and new customers. We expect Auctus’s reve-nue grow at 23% CAGR over FY15 to FY19E.

7

Source: Company

Auctus revenue to grow at CAGR of 23% during FY15-FY19E


Potential market for APL products Product Val -$bn Vol- MT Valsartan 8.7 1054 Clopidogrel 5.2 572 Pregabalin 4.8 342 Omlesatan 4.5 97 Pantoprazol 3.4 338 Losartan 3.2 662 Telmisartan 3.1 259 Cetrizine 1.0 58 Fluconazole 1.0 87 Rifaximin 0.8 85 Levocetrizine 0.6 15 Doxylamine 0.6 40

1150

1600

20002300

2645

-130 -40

50230 317

-11.3%

-2.5%

2.5%

10.0%12.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

-500

0

500

1000

1500

2000

2500

3000

FY15 FY16E FY17E FY18E FY19E

Revenues (In mn) PAT PAT Margin %(RHS)



B P W E A L T H

250

750

1250

1750

2250

0

400

800

1200

1600

2000

2400

FY16E FY17E FY18E FY19E FY20E

Revenues (In mn)

⇒ OmniChem JV gives entry into high margin CRAMS business

Under the joint venture [JV] (50:50) with Ajinomoto OmniChem (OmniChem), a facility is being set up at Vizag SEZ to manufacture high-value APIs for OmniChem’s existing customers. OmniChem is oper-ating at full capacity in its Belgium plant and there is no plan to setup additional capacity since it is not cost effective. As a part of Omnichem's business continuity plan, it intends to grow via this JV in India owing to the cost effective manufacturing base. OmniChem currently makes API’s, which are still un-der patent protection, for global pharma companies. Going forward, as these products go off patent, they will be shifted to the JV, to retain OmniChem’s customer market share by shifting to a low-cost destination like India. This will provide a steady revenue stream with healthy margins and we believe from FY18 onwards the JV will contribute rapidly after getting site approvals. Until that time, the JV will manufacture intermediates and supply it to Omnichem's Belgium plant where they will be converted into APIs. At present, this business contributes Rs.250mn to overall Granules sales. However, upon required regulatory approvals for products, Omnichem’s JV sales are expected to reach a peak of Rs.5.5bn by FY20E. We believe once its site gets approval this JV will start supplying high value API’s (Oncology, CVS, etc) to direct Innovators which we believe help the company to achieve 25%+ EBITDA margin.

8

Granules‐Omnichem JV

Innovator

Omnichem Belgium Direct Channel

In-direct Channel

Direct supply of API to Innovator will improve margin


Before Site Approval After Site Approval


OMNICHEM JV (50% Share) revenue to grow at CAGR of ~45%

45% CAGR



B P W E A L T H

US Market—CMO contracts and new product launches to drive future growth

During last five years, the formulations (FD) segment has delivered growth of CAGR of 62% on the

back of CMO contracts and US product launches. In FY15, GIL reported revenue of Rs.4,200mn from

finished products, contributing 32% of total revenue. Around 50% of formulation business was driven

by contract manufacturing contract (CMO) contracts given to global innovators and large generic play-

ers. The remaining 50% of the business came from the sale of own products in regulated markets like

the US and the EU. Currently, GIL has four product approvals for the US market namely Paracetamol,

Ibuprofen, Metformin and Neproxin. The molecule Metformin is the biggest contributor part in formula-

tion business.

During FY16 company has filled 1 ANDA and is expected to file 5-7 ANDA’s in FY17 and same for the

next two years. We expect formulation sales to pick up from FY19, with 7-8 more approvals for OTC/

Rx products. We also believe, going forward, the mix would further improve in favor of formulation

business i.e from 32% in FY15 to 48% in FY19E as it carries higher margin (~25%) overall EBITDA

margin to enhance from 16% in FY15 to ~22% in FY19E.

9


Product mix change result in healthy margin

44%

29%

15%24% 28%

25%32%

43%

60%

0%

10%

20%

30%

40%

50%

60%

70%


API PFI FD

FD carries high-e s t m a r g i n (+25%), increas-ing contribution from FD to boost EBITDA margin going forward



B P W E A L T H

Strong balance sheet with healthy return ratios and margins

RoCE and RoE have witnessed gradual improvement from 12% and 16% respectively in FY10 to 13%

and 22% in FY15. Going forward, we expect return ratios to witness a steady improvement with ramp-

ing up of the recently commissioned capacities and steady improvement in margins in next two years

on the back of increasing contribution from high growth & high margin finished dosage business and

higher operating leverage from Auctus and Omnichem. We believe increased asset sweating and mar-

gin expansion will translate into higher return ratios in the medium term.

GIL plan to incur capex of Rs.4.5bn over FY16-18 for ramping up its existing and future capacity as

well as to invest in medium-term R&D and manufacturing projects. The capex would be funded

through convertible warrant issued to promoters (Rs.2.1bn) and reaming (Rs. 2.5bn) though internal

accruals. Currently, GIL has Rs. 3.9bn of debt on its book. We expect it to repay Rs.1,600 mn debt

over FY17-19, resulting in comfortable Net D/E ratio of -0.1x by 19E from 0.8x in FY15 .

ROE follows improving PAT growth Operating leverage boosts efficiency

Comfortable financial leverage ratios Capex to enhance capacities



10

12.9% 12.5%

23.9% 23.1% 23.2%21.1% 21.3%

23.8%

12.1%11.1%

14.4%16.1%

19.7% 20.5% 20.6%21.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

RoE (%) EBIDTA (%)

14.3%12.2%

19.0% 18.2%

21.9% 22.7%24.6%

4.6% 4.3%6.9% 7.0%

8.7% 9.7% 10.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

RoCE (%) NPM (%)

0.6 0.8 1.0 0.8 0.3 0.1 0.0 -0.1

4.7 4.8

7.76.4 6.8

9.6

13.6

22.9

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

Net Debt/ Equity (x) Interest Coverage (x)

242

543

1,124

2,822

1,273 1,300

2,200

1,100

1,500

0

500

1,000

1,500

2,000

2,500

3,000


Capex (In mn)



B P W E A L T H

Company Background

Granules is a Hyderabad based company established in 1984 by Mr. C. Krishna Prasad having four

USFDA approved facilities in and around Hyderabad and one in China. GIL’s base business (~88% of

total turnover) is mainly from five molecules – Paracetamol, Metformin, Ibuprofen, Guaifenesin and

Methacarbamol. The base business has shown a robust CAGR of ~26% to Rs12.1bn in FY15 over

past 5 years. The strong growth has been on account of volume expansion as well as increase in

prices. GIL supplies these 5 molecules in the form of API, Pharmaceutical formulation intermediates

(PFI) or Formulation depending on requirement of customers. Largely an export-oriented company

( around 80% of revenues), Granules exports to more than 300 customers in 60 countries. The com-

pany derives 63% of its revenues from regulated markets of North America (32%) and EU (31%) and

balance from LATAM (11%), ROW (10%) and India (16%).

GIL plays in 75% of the overall analgesics and 49% of the overall diabetes market; Paracetamol and

Metformin respectively have maintained their status as first line of defence for these segments and

have no direct replacement in the pipeline. These products are defensible and do not have any imme-

diate threat of being replaced.

11

GIL has Presence over en-tire pharma value chain



37% 32% 37% 32%44%

38%35% 32% 33%

24%

25% 33% 31% 35% 32%

0%

20%

40%

60%

80%

100%

FY11 FY12 FY13 FY14 FY15

API PFI FD

52% 48% 48% 42% 41%

10% 17% 22%24% 23%

24% 23% 21% 22%16%

3% 1% 2% 2%2%

7% 6% 2% 4%13%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

Paracetamol Metformin Ibuprofen Guaifenesin Methocarbamol Others

Molecule-wise percentage contribution (In %) Segment-wise sales (In %)

Paracetamol, 58%

Aspirin, 17%

Ibuprofen, 16%

Analgin, 6%

Naproxen, 1%Others, 2%

Analgesics Molecule Wise market breakup Anti-diabetes Molecule wise market breakup

Metformin, 49%

Sulfonylureas,27%

GLP-1 Analogs, 2%

DPP-4 Inhbitors, 7%

Thiazolidinediones, 14%

Others, 1%



B P W E A L T H

Granules has seven manufacturing facilities, six are located in Andhra Pradesh, including one that is under construction through its CRAMS JV. Besides, it has another facility in China, which is an ibupro-fen API JV.

Granules’ major source of income over the years has been trending more from regulated and semi-regulated markets. Contributions from sales in India have fallen 18% in FY11 to around 16% in FY16E.

12

Value Chain Facility Location Approvals

API Bonthapally U.S. FDA, EDQM, WHO GMP, ISO 14001:2004, OHSAS 18001:2007

Jeedimetla U.S. FDA, KFDA, TGA, EDQM Jingmen, China (Biocause JV) U.S. FDA, MHRA, EDQM, TGA, KFDA, Health Canada Vizag (Auctus) U.S. FDA, EDQM, KFDA, WHO GMP, Health Canada Vizag SEZ (Omnichem JV - CRAMs) Awaited PFI Gagillapur U.S. FDA, EDQM, TGA, GHCA Jeedimetla HHA (Germany) FD Gagillapur U.S. FDA, TGA, GHCA API Intermediates Bonthapally (Auctus) N.A. Source: Company, BP Equities Research

24% 23%31% 30% 32%

19%14%

12% 15% 11%

29% 42% 34% 29% 31%

10%10% 8% 14% 10%

18%11% 15% 12% 16%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

North America Latin America Europe Asia, Middle East & Africa India

Geographical spread of revenue (In %)


Regulated and Non Regulated market Spread of revenue (In %)

49%61% 55% 59% 63%

51%39% 45% 41% 37%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015

Regulated Markets Other Markets

Granules India Incorporated in 1991, this is the only listed entity in the group, with 4 plants located in Hyderabad (Jeedimetla, Bonthapally and Gagillapur) and 1 in Vizag Pharma City

Granules USA Inc. 100% subsidiary, for front-end marketing in the U.S. market

Granules Biocause A 50-50 joint venture with Chinese-based Hubei Biocause. JV has been operational since 2007 and manufactures Ibuprofen API at a plant located in central China (Jingmen).

Granules Omnichem A 50-50 joint venture with Ajinomoto OmniChem, to focus on high-value, low-volume APIs and intermediates for the latter’s existing customers with a manufacturing facility at Vizag SEZ.

Granules Pharmaceutical Inc. 100% subsidiary with manufacturing setup at Chantilly, USA focused on advanced formulation development.

Granules Lifesciences 100% subsidiary located at Vizag, with multi product API manufacturing facility under construction to focus introduction of on new generic APIs.

Corporate structure




B P W E A L T H

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Granules India - Management Details Name Designation Details

Mr. C. Krishna Prasad

Managing Director

Mr. C. Krishna Prasad, the founder of GIL, has three decades of experience in the pharmaceutical industry. In 1984, he set up a paracetamol manufacturing facility, which has since become one of the world’s reputed manufacturers of paracetamol in regulated markets. Mr. Prasad pioneered and popularized the concept of pharmaceutical formulations intermediates (PFI) as a cost-efficient product for global formulations manufacturers.

Mr. Harsha Chigurupati

Executive Director

Mr. Harsha Chigurupati has been with GIL since 2005, and served as CMO from 2006-10. As CMO, Mr. Chigurupati was instrumental in commercializing the company’s Finished Dosage Division, and also changed the company’s focus to marquee customers in regulated markets. As Executive Director, Mr. Chigurupati is responsible for the standalone operations of Granules India, in-cluding the P&L.

Mr. Madhusudan Rao

Chief Operating Officer

Mr Madhusudan has over two decades of experience with global pharmaceuti-cal companies. He previously served as COO of Global Generics at Orchid Pharmaceuticals, where he was responsible for entire operations of Global ge-nerics and CRAMS businesses. Prior to it, Mr. Rao worked at Dr. Reddy’s, where he held various positions in Global Generics Portfolio Management, Global Regulatory Affairs and Compliance, API – New Product Development and Corporate Quality Assurance.

Mr. V.V.S. Murthy

Chief Financial Officer

Mr. V.V.S. Murthy has three decades of finance experience across various in-dustries, including nearly two decades in pharmaceuticals. Mr. Murthy previ-ously was Group Chief Financial Officer at Dishman Pharmaceuticals which encompassed Indian operations and nine international operations. Prior to it, Mr. Murthy was VP – Finance at Dr. Reddy’s, where he had extensive roles, including several international M&A transactions.

Mr. Stefan Lohle

Chief Marketing Officer

Mr. Stefan Lohle has over two decades of experience in the pharmaceutical industry. Mr. Lohle has been associated with Granules since 2001, and previ-ously was Head of Latin American Operations, where he primarily focused on the PFI Business. Mr. Lohle previously served at Kimberly Clark Corporation for New Project Development.


Key Milestones 1984 Granules’ predecessor company, Triton Laboratories, was established. Triton commenced manufacturing Paracetamol API at

Bonthapally on the outskirts of Hyderabad 1987 Triton became one of the first Indian pharmaceutical companies to export pharmaceutical products to the U.S.

1990 The Company opened its second manufacturing facility at Jeedimetla to produce multiple APIs

1991 Granules was incorporated and served as a trading Company

1994 Granules set up a PFI facility at Jeedimetla

1995 Granules conducted its Initial Public Offering (IPO)

2003 Granules opened a 7,200 MTPA PFI facility at Gagillapur, the largest-PFI facility in the world

2006 Granules built a new state-of-the-art Paracetamol API facility at Bonthapally to meet increased demand from the regulated markets

2007 Granules established Granules-Biocause, a JV with Hubei Biocause Pharmaceutical, a premier Ibuprofen manufacturer

2008 Granules forward integrated and commenced operations at its Finished Dosage facility at Gagillapur

2010 Granules received U.S. FDA approval for its first Abbreviated New Drug Application (ANDA)

2011 Granules established Granules-OmniChem, a JV with Ajinomoto OmniChem. The business focuses on the CRAMS space

2013 Granules completed a major expansion at its Gagillapur facility. 2013 Granules acquired Auctus Pharma.



B P W E A L T H

⇒ Peer group comparison

⇒ PE Band

Key Risks and concerns: ⇒ Regulatory Risk GIL supplies to export markets, and hence being a pharma player it is mandatory that it secures ap-provals from several regulatory bodies across the globe. The recent increase in scrutiny and adverse outcome of several players in the industry continues to be the biggest risk in the pharma sector and implies to Granules as well. ⇒ Limited disclosure risk Agreements between GIL and its partners/customers are confidential in nature. We have limited visibil-ity on the product-level/client-level information. Our assumptions are based on our analysis of publicly available information and a few citations by the GIL management. We however, continue to believe that limited disclosure in Contract Manufacturing business is a part and parcel of the business model and indicates healthy client confidentiality maintenance. ⇒ Concentration risk In the generics and API business, the companies have high dependency on select products. Hence, they face the risk of low diversity in products. Incidentally, GIL derives around 88% of its revenue from top-5 products.

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Source: BP Equities Research

Source: BP Equities, Ace Equity

GIL -PE band

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April-12 April-13 April-14 April-15 April-16

Price 3x 9x 15x 21x 27x

Company CMP M Cap P/E EPS EV/EBITDA RoE (%)

(Rs.) (Rs. Bn) FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

Granules India 132 28.6 18.4 14.2 7.2 9.3 9.1 7.3 21.1 21.3

Shilpa Medicare 478 36.8 29.6 17.6 16.1 27.2 15.6 9.9 16.5 21.7

Dishman 353 28.4 14.4 11.5 24.5 30.8 7.0 6.1 13.2 14.2

Jubilant Life 402 64.0 11.1 8.7 36.1 46.3 6.7 5.7 18.4 18.9



B P W E A L T H

Valuation and Outlook

During FY10-15, GIL’s sales has grown at a CAGR of 23% with 44% PAT growth. For the next three years i.e. FY16-19E we expect the company’s sales to grow by 20% and PAT by 33%. We expect company’s EBITDA margins to improve 16.1% in FY15 to 22% in FY19E, on the back of operational efficiency, moving up the value chain towards high margin business, improved capacity utilization & capitalizing Auctus Pharma’s portfolio. We believe GIL’s strategy of entering into long term supply agreements with global pharma companies helps it in safeguarding its margins.

At the CMP of Rs 132, the stock is trading at 18x/14x/10x of our FY17E/F18E/FY19E expected earn-ings respectively. However, the stock has run up in the past, we believe the valuations are attractive and the stock can give decent returns in the future. We initiate coverage on the stock & recommend ‘BUY’ rating by assigning 14x to its FY19E earning (after factoring ~5% dilution from warrants). We arrive at a target price of Rs 179 (potential upside of 36% from CMP) for an investment horizon of 12-18 months.

15

We have valued this stock by assigning 14x to its FY19 earning estimates. We arrive at a target price of Rs 179(potential upside of 36% from CMP) for an investment hori-zon of 12-18 months.

Source: Company, BP Equities

Valuation Basis FY16 FY17 FY18 FY19

Granules India Ltd

EPS 4 5.8 7.2 9.3 12.8

Growth in EPS (YoY %) 30% 24% 30% 38%

Implied PE 23 18 14 10

Assigned PE (14x PE) 14 14 14 14

Target Price 179

(Implied PEG Ratio considering next 3 years: 0.5)

CMP 132

Upside Potential (%) 36%



B P W E A L T H

16



Profit & Loss A/c ( Consolidated) YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E Net Sales 10,959 12,929 14,331 16,839 20,157 24,571 Growth % 43.4% 18.0% 10.8% 17.5% 19.7% 21.9% Total Operating Revenue 10,959 12,929 14,331 16,839 20,157 24,571 Growth % 43.4% 18.0% 10.8% 17.5% 19.7% 21.9% Less: Raw Material Consumed 6,453 7,470 7,598 8,858 10,612 12,713

Employee Cost 858 1,070 1,270 1,474 1,753 2,126

Other Expenses 2,065 2,304 2,634 3,062 3,631 4,338

Total Operating Expenditure 9,376 10,843 11,502 13,395 15,995 19,178 EBIDTA 1,583 2,086 2,829 3,445 4,162 5,393 Growth % 86.2% 31.8% 35.6% 21.8% 20.8% 29.6% Less: Depreciation 298 527 636 745 814 938 EBIT 1,285 1,560 2,193 2,700 3,348 4,455 Growth % 107.4% 21.4% 40.6% 23.1% 24.0% 33.1% Interest Paid 204 323 414 360 306 236 Non-operating Income 43 43 90 104 124 146 Profit Before tax 1,124 1,280 1,869 2,444 3,165 4,365 Tax 371 371 617 807 1,045 1,440 Net Profit before Minority 752 909 1,252 1,638 2,121 2,924 Minority Interest 0 0 0 0 0 0 Net Profit 752 909 1,252 1,638 2,121 2,924 Adjusted Profit 752 909 1,252 1,638 2,121 2,924 Reported Diluted EPS Rs 3.7 4.5 5.8 7.2 9.3 12.8 Growth % 129.2% 20.0% 29.8% 24.2% 29.5% 37.9% Adjusted Diluted EPS Rs 3.7 4.5 5.8 7.2 9.3 12.8 Growth % 129.2% 20.0% 29.8% 24.2% 29.5% 37.9%

Common Sized Profit & Loss Account ( Consolidated) YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E

Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Less:

Raw Material Consumed 58.9% 57.8% 53.0% 52.6% 52.6% 51.7%

Employee Cost 7.8% 8.3% 8.9% 8.8% 8.7% 8.7%

Other Expenses 18.8% 17.8% 18.4% 18.2% 18.0% 17.7%

Total Operating Expenditure 85.6% 83.9% 80.3% 79.5% 79.4% 78.1%

EBIDTA 14.4% 16.1% 19.7% 20.5% 20.6% 21.9%

Depreciation 2.7% 4.1% 4.4% 4.4% 4.0% 3.8%

Interest Paid 1.9% 2.5% 2.9% 2.1% 1.5% 1.0%

Non-operating Income 0.4% 0.3% 0.6% 0.6% 0.6% 0.6%

Extraordinary Items 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Profit Before Tax 10.3% 9.9% 13.0% 14.5% 15.7% 17.8%

Current tax 3.4% 2.9% 4.3% 4.8% 5.2% 5.9%

Profit/Loss of Associate Company 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Profit After Tax 6.9% 7.0% 8.7% 9.7% 10.5% 11.9%

Adjusted Profit 6.9% 7.0% 8.7% 9.7% 10.5% 11.9%



B P W E A L T H

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Cash Flows ( Consolidated) YE March (Rs. Mn) FY14 FY15 FY16E FY17E FY18E FY19E PAT 752.3 909.1 1,252.1 1,637.5 2,120.8 2,924.4 Less: Non Operating Income (43.1) (43.4) (90.2) (104.5) (123.5) (146.2) Add: Depreciation 298.1 526.5 636.1 744.9 813.6 938.4 Add: Interest Paid 204.3 323.5 414.2 360.1 306.1 235.8

Operating Profit before Working Capital Changes 1,211.6 1,715.6 2,212.2 2,638.1 3,116.9 3,952.4 (Inc)/Dec in Current Assets (503.2) (439.2) (102.3) (375.1) (495.3) (649.9) Inc/(Dec) in Current Liabilities 713.1 867.5 (70.1) 435.7 571.0 768.3 Changes in Inventory (376.8) (503.5) 72.5 (191.2) (427.1) (552.7)

Net Cash Generated From Operations 1,044.6 1,640.5 2,112.2 2,507.5 2,765.5 3,518.0 Cash Flow from Investing Activities (Inc)/Dec in Fixed Assets (2,664.9) (1,898.6) (1,300.0) (2,200.0) (1,100.0) (2,000.0) (Inc)/Dec in Capital Work In Progress (157.6) 625.2 0.0 0.0 0.0 0.0 (Inc)/Dec in Investment (Strategic) 0.0 0.0 0.0 0.0 0.0 0.0 (Inc)/Dec in Investment (Others) 120.8 (166.1) 0.0 0.0 0.0 0.0 Add: Non Operating Income 43.1 43.4 90.2 104.5 123.5 146.2

Net Cash Flow from/(used in) Investing Activities (2,644.9) (1,360.6) (1,209.8) (2,095.5) (976.5) (1,853.8) Cash Flow from Financing Activities 0.0 0.0 0.0 0.0 0.0 0.0 Inc/(Dec) in Total Loans 1,569.6 431.7 (500.0) (500.0) (500.0) (650.0) Inc/(Dec) in Reserves & Surplus 129.7 (53.4) 1,027.8 1,075.1 0.0 (0.0) Inc/(Dec) in Equity 0.9 (1.1) 12.5 11.4 0.0 0.0 Dividend Paid (71.8) (102.6) (134.3) (175.6) (227.4) 0.0 Less: Interest Paid (204.3) (323.5) (414.2) (360.1) (306.1) (235.8) Adjustments 176.6 31.3 0.0 (0.0) 0.0 (0.0)

Net Cash Flow from Financing Activities 1,600.7 (17.6) (8.2) 50.8 (1,033.5) (885.8) Net Inc/Dec in cash equivalents 0.4 262.3 894.2 462.7 755.5 778.4 Opening Balance 417.1 417.5 679.7 1,573.9 2,036.7 2,792.1 Closing Balance Cash and Cash Equivalents 417.5 679.7 1,573.9 2,036.7 2,792.1 3,570.5



B P W E A L T H

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Balance Sheet ( Consolidated) YE March( Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E Liabilities Equity Capital 203 204 217 228 228 228 Share application money pending allotment 3 0 0 0 0 0 Reserves & Surplus 3,354 4,107 6,253 8,790 10,683 13,608 Equity 3,560 4,312 6,470 9,018 10,911 13,836 Preference Share Capital 0 0 0 0 0 0 Net Worth 3,560 4,312 6,470 9,018 10,911 13,836 Minority Interest Net Deferred tax liability/(Asset) 343 545 545 545 545 545 Total Loans 4,102 4,331 3,831 3,331 2,831 2,181 Capital Employed 8,004 9,188 10,846 12,894 14,287 16,562 Assets Gross Block 6,539 8,438 9,738 11,938 13,038 15,038 Less: Depreciation 1,714 2,272 2,908 3,653 4,467 5,405 Net Block 4,825 6,166 6,829 8,285 8,571 9,633 Capital WIP 1,246 620 620 620 620 620 Long Term Loans & Advances 43 209 209 209 209 209 Non Current Investments 2 2 2 2 2 2 Current Assets Inventories 1,742 2,245 2,173 2,364 2,791 3,344 Sundry Debtors 1,109 1,326 1,350 1,586 1,898 2,314 Cash and Bank Balance 417 680 1,574 2,037 2,792 3,571 Loans and Advances 288 265 294 344 410 487 Other Current Assets 213 458 508 597 714 870 Total Current Assets 3,769 4,974 5,898 6,927 8,605 10,586 Less: Current Liabilities & Provisions Sundry Creditors 1,355 1,887 1,720 1,982 2,323 2,785 Provisions 83 123 136 160 192 234 Other Current Liabilities 478 774 858 1,008 1,206 1,470 Total Current Liabilities & Provisions 1,916 2,784 2,714 3,149 3,720 4,489 Capital Applied 8,004 9,188 10,846 12,894 14,287 16,562



B P W E A L T H

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Key Ratios ( Consolidated) YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E Key Operating Ratios EBITDA Margin (%) 14.4% 16.1% 19.7% 20.5% 20.6% 21.9% Tax / PBT (%) 33.0% 29.0% 33.0% 33.0% 33.0% 33.0% Net Profit Margin (%) 6.9% 7.0% 8.7% 9.7% 10.5% 11.9% RoE (%) 23.9% 23.1% 23.2% 21.1% 21.3% 23.6% RoCE (%) 13.0% 13.2% 15.3% 15.8% 17.1% 20.0% Current Ratio (x) 2.0x 1.8x 2.2x 2.2x 2.3x 2.4x Dividend Payout (%) 9.5% 11.3% 10.7% 10.7% 10.7% 0.0% Book Value Per Share (Rs.) 17.6 21.1 29.9 39.5 47.8 60.7 Financial Leverage Ratios Net Debt/ Equity (x) 1.0 0.8 0.3 0.1 0.0 (0.1) Interest Coverage (x) 7.7x 6.4x 6.8x 9.6x 13.6x 22.9x Interest / Debt (%) 6.1% 7.7% 10.1% 10.1% 9.9% 9.4% Growth Indicators % Growth in Gross Block (%) 68.8% 29.0% 15.4% 22.6% 9.2% 15.3% Sales Growth (%) 43.4% 18.0% 10.8% 17.5% 19.7% 21.9% EBITDA Growth (%) 86.2% 31.8% 35.6% 21.8% 20.8% 29.6% Net Profit Growth (%) 131.0% 20.8% 37.7% 30.8% 29.5% 37.9% Diluted EPS Growth (%) 129.2% 20.0% 29.8% 24.2% 29.5% 37.9% Turnover Ratios Debtors (Days of net sales) 30 34 34 34 34 34 Creditors (Days of Raw Materials) 44 55 55 54 53 53 Inventory (Days of Optg. Costs) 88 97 97 97 96 96

Valuation Ratios

YE March (Rs. mn) FY14 FY15 FY16E FY17E FY18E FY19E

P/E (x) 35.6x 29.7x 22.9x 18.4x 14.2x 10.3x

P/BV (x) 7.5x 6.3x 4.4x 3.3x 2.8x 2.2x

EV/EBIDTA (x) 19.3x 14.7x 10.9x 9.1x 7.3x 5.3x

EV/Sales 2.8x 2.4x 2.2x 1.9x 1.5x 1.2x

Market Cap./ Sales (x) 2.4x 2.1x 2.0x 1.8x 1.5x 1.2x

Dividend Yield (%) 0.3% 0.4% 0.5% 0.6% 0.8% 0.0%

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Analyst (s) holding in the Stock : Nil

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20 Institutional Research BP Equities Pvt. Limited (www.bpwealth.com) 27/04/2016

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BP Equities_Granules India Ltd_Initiating Coverage_BUY_Trgt 179_27th Apr 2016