Recommendation From Pharmaceutical Sector

This section gives a recommendation of a stock having stock margin padding price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon

Granules India Ltd

BOOST YOUR FINANCIAL HEALTH WITH GIL 

HERE IS WHY
New product launches
Higher realisations
Debt reduction 

Granules India Ltd. (GIL) is a vertically integrated pharmaceutical company. It is engaged in the manufacturing of active pharmaceutical ingredients (APIs), pharmaceutical formulation intermediates (PFIs) and finished dosages (FDs).

On the consolidated quarterly front, the company reported a YoY growth of 21.7 per cent in net sales to Rs.613.32 crore in Q4FY19 from Rs.503.82 crore in Q4FY18. EBITDA stood at Rs.97.61 crore in Q4FY19 as compared to Rs.43.64 crore in Q4FY18, marking an increase of 123.67 per cent. EBITDA margin improved 725 bps YoY to 15.9 per cent in Q4FY19 from 8.7 per cent in Q4FY18. Net profit exhibited a healthy growth of 132.01 per cent as it rose to Rs.45.04 crore in Q4FY19 from Rs.17.19 crore in Q4FY18. As a result, EPS increased to Rs.2.52 in Q4FY19 from Rs.0.81 in Q4FY18, marking a growth of 211.11 per cent.

The company posted a positive set of numbers for the year ended March 31, 2019. The consolidated total income from operations rose 76.28 per cent YoY to Rs.2,279.20 crore in FY19 from Rs.1,292.92 crore in FY18. EBITDA climbed 84.09 per cent YoY to Rs.384.04 crore in FY19 from Rs.208.61 crore in FY18. Net profit surged 106.43 per cent YoY to Rs.187.67 crore in FY19 from Rs.90.91 crore in FY18. Consequently, EPS increased 108.52 per cent to Rs.9.30 in FY19 from Rs.4.46 in FY18. 

The strong performance is attributable to healthy ramp-up in formulations and API supplies. The new product launches, expanded capacities and lowering raw  material costs also helped in achieving healthy revenue growth. EBITDA margin expansion was curtailed to an extent, despite sturdy operating leverage. This is on account of higher spends on R&D. The formulations segment performed very well for yet another quarter as it grew 59 per cent YoY. Contrarily, the API segment, which grew 9.6 per cent YoY, was hampered by delays in the US approvals. This ultimately resulted in lower realisations from expanded API capacities. Nonetheless, the outlook for API sales is optimistic in FY20 with an expected US FDA approval in H2FY20. However, the PFI segment will likely remain subdued due to a shift in customer preferences to formulations.

Moving forward, we can anticipate an improvement in realisations on the back of the US approvals for new API plants. Margins are likely to improve due to a ramp-up in export supplies. The company’s net debt declined 14 per cent since September 2018 and was reported at Rs.840 crore. Furthermore, its cash conversion improved by 22 days to 118 days owing to lower receivables.

Presently, the promoter holding stands at 42.90 per cent, of which 43.40 per cent is pledged. However, efforts are being made to bring down the proportion of pledged shares. Since the company is out of its capex phase, its ability to generate adequate free cash flows hereon will aid in debt reduction. Furthermore, by successfully passing the raw material costs on to customers, GIL has good earnings growth visibility in the upcoming quarters. By virtue of these factors, we urge our reader-investors to BUY this stock.