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Granules India Stock Analysis

Indian Pharmaceutical Sector Overview

►    The Indian pharmaceuticals market increased at a CAGR of 12.79 % in 2015 from US$ 6 billion in 2005, and is expected to expand at a CAGR of 15.92 % to US$ 55 billion by 2020.

►    The Indian pharmaceuticals market is the third largest in terms of volume and thirteen largest in terms of value, as per a report by equity master.

►    Branded generics dominate the pharmaceuticals market, constituting nearly 70 to 80 % of the market.

►    India is the largest provider of generic drugs globally with the Indian generics accounting for 20 % of global exports in terms of volume.
►    The Indian pharmaceutical market size is expected to grow to US$ 100 billion by 2025.
►    The top five exporting destination countries are USA, Russia, Germany, Austria, and UK.
►    100% foreign direct investment (FDI) is allowed under automatic route in the drugs and pharmaceuticals sector, including those involving use of recombinant technology.
►    The Indian pharma industry stands diversified into various spheres of activities including
  • Research and development (R&D)
  • Manufacturing of branded, generic and branded generic drugs
  • Manufacturing APIs
  • Laboratory testing and clinical research

Opportunities and Threats for Pharma Sector in India

►    Healthcare spend is expected to grow to 13% of average household income by 2025.
►    Significant patent expiries in developed markets present  during 2012-15 is a good growth opportunities for Indian generic companies.
►    Emerging markets to become the next destinations for pharma companies.
►    M&A a potential catalyst.
►    Increased attractiveness of bio-similars.
►    Product pipeline drying up.
►    Patent expiries could cannibalize other generic molecules in India.
►    Big Pharma moving into generics.
►    FDA delays, compliance issues.
►    National Pharmaceuticals Policy 2006.
 Global  Scenario – Outlook
►    Pharmaceutical market size – US$ 320 billion.
►    United States remains the largest pharmaceutical market, globally.
►    The Pharmaceutical market is expected to grow at CAGR 5%.


►    The European generics market is quite diverse.
►    U.K, Germany and Netherland are characterized by relatively high generic penetration (~50%+) of generics.
►    France, Italy and Spain have low generic usage at around 25%.
►    The Pharmaceutical market is expected to grow at CAGR 4%.

Introduction to Granules India

Granules – Analysis

Geography – Wise Revenue Breakup

Granules India

Risk Mitigation Employed by Granules

Operations Risk

►    The Company has received regulatory approvals from major regulatory agencies, such as the U.S. FDA, Australian TGA,Canadian TPD and German Health Authority.

►    As being a B2B company the customers of Granules conduct 4-5 audits each month (which are more stringent than USFDA) unlike the B to C companies which are more relaxed in handling and managing processes.

►    The Company possesses three internationally benchmarked manufacturing facilities in India and one in China.

►    The Company ensures strict adherence to quality management systems through robust quality processes.

►    The Company possesses integrated facilities ranging from the manufacture of PFIs (strategically backward integrated through in-house API manufacture) to finished dosages (tablets).

Raw Material Risk

►    The Company entered into long-term contracts with approved vendors, establishing itself as a preferred buyer.

►    The Company implemented ERP, strengthening raw material planning.

Geographic Risk

►    The Company is present in 60 countries.

►    Plans to enhance penetration in Southeast Asia and Gulf Cooperation Council countries.

Environment Risk

The Company proactively invested in modern effluent treatment units, curbing effluent generation to below permissible limits and targeting zero discharge status.

Granules – A Complete Analysis
Competitive Advantage

Business model: A strong presence across the entire value chain has transformed the Company from being an API manufacturer to a global pharmaceutical player.

Customer Centricity: Strong business associations with global pharmaceutical majors, resulting in long-term revenue visibility.

Economies of Scale: The Company’s facilities can accommodate large-scale customers with its industry-leading batch size in PFIs.

Flexibility: Being spread across the pharmaceutical manufacturing value chain enables the Company to offer customer flexibility.

Approved Facilities: Manufacturing facilities aligned with rigorous global operating benchmarks and approved by global regulatory authorities provide a wide footprint in regulated and semi-regulated markets.

Business Strategy/ Road Ahead

►    Continue producing high-quality APIs in-house and gradually shift the business from low-margin APIs to high-margin formulations.
►    Expand  product offering with high value APIs and integrate in the future with formulations.
►    Emphasis on regulated markets which will help operating margins expand.
►    Strict adherence to quality management systems through robust processes.
►    It capitalizes on  strong customer relationships to build and pursue growth opportunities.
Shareholder Returns Over 5 years
 Relative Valuation
 Granules India Financial Projections
 Granules India – Future Triggers and Recommendations
►    Strong revenue growth momentum to continue with the commissioning of ongoing expansion projects including additional capacity for Metformin (2HFY17), Guaifenecin (2HFY17) and expansion of PFI capacity in 2HFY16.
►    Expansion into higher margin finished dosages and increasing the product share in FD.
►    Omnichem JV will provide the additional earnings trigger beyond FY17.
►    FDs contributed around 29%, PFIs 27%, and APIs 44% of consolidated sales during  Q2FY16. Management expects FD to contribute to around 60% of sales in next 5 years.
►    Increasing contribution from regulated markets. Regulated markets contributed 55% while ROW contributed 45% of sales.
►    Capex for Phase-I Metformin capacity expansion (3600 tonnes) is INR400-500mn which will be completed by Aug-16. Capex for Phase-II expansion (3400 tonnes) will be INR200-250 mn will be in FY17.
 Based on all these triggers which are to unfold over the next 3 years and basing it on our valuation, we would recommend “BUY” on Granules for a longer term investment.