Stock Pick From The Healthcare Sector

Here Is Why:

• The company benefits from a well-diversified revenue and geographical segmentation.
• Increased sales of higher value products that offer stronger margins like Metformin, Ibuprofen and Guaifenesin has aided its performance.
• The stock is available at a relatively lower PE of 6.93x.

Granules India (GIL) is one of the pharmaceutical companies in India, which has not enjoyed the kind of price appreciation that its peers have seen in the recent past. However, this company has been able to report a strong set of numbers in the past five years. Its topline and bottomline in this period has witnessed a CAGR of 28 per cent and 70 per cent respectively.

GIL is a fully vertically integrated pharmaceuticals manufacturing company. The company is headquartered in Hyderabad, with sales offices in the US, UK, Columbia and China. It services the growing needs of over 300 quality-conscious customers in the regulated and semi-regulated markets across 60 nations.

The business model of the company merits attention. While most pharmaceutical manufacturers focus on one product vertical, this company has presence across the value chain, with three core lines, viz. active pharmaceutical ingredients (APIs), pharmaceutical formulation intermediates (PFIs) and Finished Dosages (FDs). The company’s API facilities are among the premier ones, and its FD facility is among the world’s largest single-site capacity facilities.

GIL has diversified its sales by reducing the contribution from Paracetamol to less than 50 per cent in FY13 from 70 per cent in FY08. It has increased the sales of higher value products that offer stronger margins like Metformin, Ibuprofen and Guaifenesin. It has also been able to diversify its revenues evenly across all the three broad segments it operates in. As of FY13, APIs contribute 37 per cent to the revenues, while PFI and FD account for 32 per cent and 31 per cent respectively. As mentioned earlier, increasing the production of higher margin products like Metformin, Ibuprofen and Guaifenesein has helped the company perform at a better rate as compared to its peers.

Apart from products, the company has been able to diversify well in terms of geography too. The domestic market contributes 21 per cent, while North America and Europe makes for a total of 54 per cent. The remaining 25 per cent comes from Latin America and the AMEA (Asia, Middle East and Africa) region.

In a recent development, the company has announced signing a definite agreement for the acquisition of leading API manufacturer, Auctus Pharma. The facility acquired is approved by leading agencies like USFDA, EQDM, Health Canada, KFDA and WHO-GMP. The API facility is located in Vishakhapatnam and the intermediate facility is in Hyderabad. Auctus’ product portfolio includes 12 APIs as well as the key intermediates of those APIs. The portfolio includes APIs in several therapeutic categories such as antihistaminics, antihypertensives, antithrombotic and anticonvulsants as well as other therapeutic categories.

The management says that this acquisition fits into their strategy of being a fully integrated manufacturer, while diversifying their product portfolio by adding high-value products with significant market demand. Auctus provides the company with a meaningful API platform with a US FDA-approved site, which will in turn strengthen its FD division.

GIL has also announced the opening of a 10000 sq. ft. R&D facility in Hyderabad. The new facility will focus on full-scale generic API development and will supplement the company’s existing R&D facility in Pune, which currently focuses on sustainable technology development.

GIL posted robust numbers in the recently concluded September 2013 quarter. Its net revenues grew by 52 per cent to stand at Rs 266 crore for Q2FY14 compared to Rs 175.5 crore reported in the same quarter last year. The EBITDA for Q2FY14 stood at Rs 39.9 crore, marking an increase of 59 per cent on a YoY basis. The net profit came in at Rs 15.1 crore for Q2FY14 as compared to Rs 8.1 crore, a jaw-dropping rise of 87 per cent. On a TTM basis, the company trades at a PE of 6.93x. We believe that the stock can be added to one’s portfolio for the longer-term, with a potential return of 20 per cent from the current price levels.