Stock Pick From The Heathcare Sector

Low Priced Scrip is hidden gem, today's underdog, a stock with future potential that is expected to fetch returns within 1 year. This is a stock picked carefully based on a fundamental analysis of the company.

The company recommended as the Low Priced Scrip for this issue is a leading company from the healthcare sector which also has a presence across the pharmaceuticals manufacturing value chain.

Granules India - Rx For Healthy Returns

• GIL has been clocking a five-year CAGR of 28 per cent against the 14-15 per cent growth that the sector as a whole has been recording.
• It has a presence across the pharmaceuticals manufacturing value chain through three business verticals – Active Pharma Ingredients (APIs), Pharmaceutical Formulation Ingredients (PFIs) and Finished Dosages (FDs).

Does it really make sense to recommend a scrip that has already soared by a humongous 58 per cent on a Year-to-Date basis? Well, yes, if it happens to be Granules India (GIL). But why is this so? The company is in a major expansion mode, which is sure to take it to the next level. GIL has seen a consistent improvement in its EPS over the past three years, and has been paying dividends consistently over the past nine years. This is precisely why we are recommending this stock to our readers, as we think that it can give them at least 20-25 per cent returns.

CMP as on June 12, 2012

GIL has a presence across the pharmaceuticals manufacturing value chain. It has three business verticals, viz. Active Pharma Ingredients (APIs), Pharmaceutical Formulation Ingredients (PFIs) and Finished Dosages (FDs). While it has facilities in India and China, it also has a presence in 60 other countries. Currently, PFIs add 35 per cent to its topline, while FDs and APIs add 33 per cent and 32 per cent respectively.

GIL has a capacity of 18000 tonnes per annum each of APIs and PFIs. It also has a capacity of 18 billion tablets in the FD segment. The company has already increased its API manufacturing capacity to service the higher demand, which means that this segment will continue to add incremental revenues in the future. It intends to double its PFI capacity and triple its FD capacity in FY13.

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GIL manufactures a variety of drugs, among which, Paracetamol is the largest product of the company, contributing to almost 50 per cent of its revenues. Up till FY08, Paracetamol’s contribution was around 70 per cent of the total revenues of the company. However, over the past few years the company’s dependence of Paracetamol has come down due to the higher sales of Metformin, Ibuprofen and Guaifenesin.

The good thing about the business of this company is that it has clients striving for a value proposition. What this means is that its clients pay a reasonable price for the products, not chasing higher discounts. Another point worth mentioning is that the company has successfully converted increasing numbers of its customers from APIs to FDs, which ensures that the capacities will be fully booked.

We see a very high revenue visibility for FY13 due to the capacity expansion that the company has undertaken. Besides this, it has also entered into a 50-50 joint venture with Belgian company Ajinomoto OmniChem to manufacture pharmaceutical intermediates and APIs. Through this JV, the company will manufacture products in the specialties segments like cardiovascular, CNS and oncology, which will boost its revenues as well as the profit margins.

On the financial front, GIL reported a 38 per cent growth in revenues to `654 crore in FY12. Its net profit grew by 43 per cent to `30 crore in the same period. Though the company’s debt has increased in FY12, its low debt-to-equity ratio (0.3x) and the higher interest cover ratio (3.6x) indicates that it can service its debt comfortably.

On the valuations front, GIL’s PE (6.4x) looks cheap as compared to that of its nearest competitor, Suven Life Sciences (11.2x). We believe that FY13 will be a very eventful year for the company, and hence, recommend this counter to our readers with a 20-25 per cent returns perspective.