Granules Networth IC TP 117

8/3/2019 Granules Networth IC TP 117

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INDIA

InstitutionalResearch

Pharmaceuticals

InitiatingCove

GRANULESINDIALTD.(GIL)

Enrichedofferingsto boostprofitability

nitiatingCoverage

NetworthResearchisalsoavailableonBloombergandThomson

Date:16

February,2012

Analyst:

[email protected]

TelNo.:02230225900

GIL, initiallyamanufacturerofbulkdrugs,has transformed itself intoa

complete

solutions

provider

for

global

pharma

majors.

It

has

developed

integral global alliances on the back of strong technological expertise

andmanufacturingcapabilities,bolsteredbyaptfocusuponqualityand

regulatorycompliances.Webelievethatwithinthenext2years,GILwill

emergeasastrongsupplieroffinisheddosagesintheglobalmarket.

Strong growth in Finished Dosages (FD) to drive revenues:

With strong intent to upgrade its offering, GIL has increased thrust on

finished dosages. With global generics poised for highgrowth;

augmenting manufacturing capacities, increasing utilizations and

enrichment of its portfolio will assure robust revenue growth. FD

revenuegrew 13x from mereRs78mn inFY09 to Rs 1,032mn in FY11,

andprojectedtogrowCAGR75%toRs3,157mnoverFY1113E.

Recent FDA approvals Significant milestone achieved:Recent FDA approvals have underscored GILs prowess in regulatory

compliance protocols, manufacturing skills, consistent ability to deliver

worldclass quality. This portrays GIL as an integral partner capable of

timelysuppliesofhighquality,regulatorapprovedfinishedproducts.

Synchronized capacity augmentations (API and PFI) to fuel momentum:

Since GIL is now focused more towards FDs, the API segment is

projectedtogrowatslowpaceat8%CAGRoverFY1113Eagainst22%

CAGR over FY0811, due to greatercaptive use. But the relatively high

marginPFI(pharmaformulation intermediates)segment isprojectedto

growathigherpaceviz.38%CAGRoverFY1113Ev/s6.5%CAGRduring

FY0811.

Enriched portfolio to boost profitability and strengthen Balance Sheet:

Robust uptick in margins would be observed, primarily aided by

proficient raw material sourcing, operational efficiency and complete

vertical integration. Improving interest coverage and healthier return

ratiostoenableGILtoturnFCFpositivebyFY13E.

Valuations:

With increased thrust towards an enriched offering, we believe the

companywoulddeliverrobustincomeandprofitof35%and56%CAGR

overFY1113E.Thestockcurrentlytradesat3xitsFY13EEPSofRs23.4.

AtCMPofRs70,weinitiatecoveragewithBuyrecommendationwith

a 1year price target of Rs 117 (5x FY13E EPS), implying an upside of

67%.

Rating

TargetPrice

CMP

Upside

Sensex

Key Data

BloombergCode G

ReutersCode GR

NSECode GRA

CurrentShareo/s(mn)

DilutedShareo/s(mn

MktCap(`bn/$mn) 1

52WK

H/L

(`)

DailyVol.(3MNSEAvg)

FaceValue(`)

Beta

1USD/`

ShareholdingPattern

Promoters

FII

Others

Relative

Price

Performance

PricePerformance(%)

1M 6M

GRANULES 11.1 12.2

NIFTY

12.8

9.3

Source:Bloomberg;*Ason15Feb,20

xhibit1:Key Financials (Consolidated) (

Particulars NetSales Gr%YoY EBITDA Gr%YoY APAT Gr%YoY EPS(Adj.) Gr%YoY P/EPS EV/EBITDA RONW(%) RO

FY09 2,893 427 42 2.0 35.8 7.6 2.4

FY10 4,611 59.4 614 43.8 304 615.2 14.0 615.2 5.0 4.6 16.1

FY11 4,752 3.1 563 (8.4) 209 (31.2) 9.6 (31.2) 7.3 4.9 9.9

FY12E 6,294 32.5 693 23.2 252 20.8 11.6 20.8 6.0 4.9 10.9

FY13E 8,560 36.0 1,138 64.3 508 101.4 23.4 101.4 3.0 3.0 19.1

ource:Company,NetworthResearch

4,600

5,000

5,400

5,800

6,200

14

Feb

11

6Mar11

26

Mar

11

15

Apr

11

5May

11

25

May

11

14

Jun

11

4Jul11

24

Jul11

13

Aug

11

2Sep

11

22

Sep

11

12

Oct

11

1Nov

11

21

Nov

11

1 1

D

1 1

NIFTY GIL


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InvestmentRationale:

EnrichingitsOfferingsrealigningitsportfoliotowardsFinishedDosages(FD)

Leveragingitssoundtechnologicalknowledgeandmanufacturingskills inAPIandPFI,GincreaseditsthrustonFDwithintenttoenrichitsbasketofofferings.

Backed by strong vertical integration, the increased thrust on downstream productsgeneratestrongrevenuegrowthalongwithrobustprofitability.

Favorableglobalscenariotoaidpositivemomentumgoingforward

Drugs having a current marketsize topping USD 100bn losing their patentcover over2015E, sustained implementation of governmentmandated healthcare reforms an

growingneedforaffordablemedicationareprimedrivingfactorsofglobalgenericsdema

Increasedawarenesswithinthegrowingmiddleclasstogenerateincreasedinclinationtolifestyle and preventative medication, and augment demand for costeffective and q

healthcare.

Approximately70%oftheglobalpharmaceutical growthisexpectedtocomefromoutsideveloped markets, on the back of highquality and costeffective supplies coming

emergingmarkets.

Exhibit2:FinishedDosages CapacityExpansion Exhibit3:FinishedDosages RevenueGrowth

Source:Company,NetworthResearch Source:Company,NetworthResearch

6

18

0

2

4

6

8

10

12

14

16

18

20

Current Expanded

BnTabletsperannum

0

1,000

2,000

3,000

4,000

5,0006,000

7,000

8,000

9,000

10,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY

INRmn

ConsoldtdRevenues(INRmn) FD(INRmn)

Revenuecontribution

of

finished

dosages to total revenue grew

from 3% to 25% over FY0911

and seen to grow to 40% over

FY1113E. (% contribution to

Standalonerevenues)


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Genericspoisedforhigh-growthacrosstheglobe

Robust growth coming from dual factors: Major thrust (60%) to be provided by incrpenetrationrates,whiletherest(40%)wouldbepropelledbynewlyavailablegenerics.

Increased generic penetration would come from the ballooning middleclass popuwhereinhigherawarenessandexpandingdisposable incomeswouldencouragethemto

forlifestyleandpreventativemedications(highmargintherapies).

FinishedDosagesportfolio(Singleactives) FinishedDosagesportfolio(MultipleActives)

Paracetamol IbuprofenandMethocarbamol

Ibuprofen IbuprofenandPseudoephedrineHCI

Guaifenesin Ibuprofen,PseudoephedrineHCIand

MetforminHCI ChlorpheniramineMaleate

NaproxenSodium ParacetamolandDiphenhydramineHCl

Diphenhydramine

Paracetamoland

Methocarbamol

Paracetamol andCodeinePhosphate

Paracetamol, PhenylephrineHCland

ChlorpheniramineMaleate

Paracetamol, PhenylephrineHCland

DextromethorphanHBr

Paracetamol andDiphenhydramineHCl

Paracetamol &PhenylephrineHCI

WebelievethatoverCY1015E,theshareofpatenteddrugswouldfallfrom64%to53%;theshareofgenericsisexpectedtorisefrom27%to39%.(Source:IMS;NetworthResear

StrongerfocusuponFinishedDosagesadvancingalongthevaluechain

Capacityexpansionandgreaterutilizationstoaugmentscales:Strategiccapacityexpaacross verticals (FD along with API and PFI) are expected to be completed by Ap

(Production

API

commenced;

PFI

&

FD

Jun12E).

Increasing

utilizations

of

exp(regulatorapproved)capacitiesandbenefitsofgreaterscalestokickinQ2FY13Eonwards

Realignment of product portfolio would generate strong revenue growth and maStrategic reorientation of its portfolio, with a bias towards downstream finished pro

assuresbuoyantrevenuegrowthalongwithrobustmargins.

TimedentryintoGlobalgenerics:WithglobalgenericsdemandpoisedforhighgrowthtimingforentryintoFDcouldnothavebeenbetter.Withanobjectivetograbahigher

marketshare,management looks forward to complete thestrategicexpansion,and in

overallutilization,onbackoffirmcontractsfromitsglobalpharmamajors.

TheFinishedDosagessegmenthasgrown13.2xfromRs77.9mntoRs1,032.4mnoverFY0911,a

anticipaterevenueCAGRof74.9%toRs3,156.7mnoverFY1113E.

Exhibit4:GlobalPharmaMarket Exhibit5:DevelopingandEmergingMarkets

Source:IMS,NetworthResearch Source:IMS,NetworthResearch

605

651 7

20 7

88

819

856

1

,100

7 7 7 67

4

28

0

5

10

15

20

25

30

0200 400 600 800

1,0001,200

2005 2006 2007 2008 2009 2010 2015E

(%)

USDbn

Market(USDbn) GrowthYoY(%)

311

147 151

350

160

315

0

50

100

150

200

250

300

350

400

450

US EU EM

USDbn

F Y1 0 F Y1 5E


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RecentFDAapprovalsSignificantmilestoneachieved

RecentFDAapprovalshavehighlightedtheprowessofthecompanyinregulatorycompprotocols,

manufacturing

skills,

and

consistent

ability

to

deliver

world

class

quality.

ThisportraysGILasanintegralpartnercapableofsupplyinghighquality,timelyandreguapprovedfinishedproducts,elevatingGILsvaluecontributiontowardsglobalalliances.

Denting the mostlucrative pharmaceutical market: Since early days, GIL has maintained uns

focusuponregulatedmarkets(EUandNorthAmerica),justifyingitsemergenceasareputedsupp

BigPharmaplayersacrossregulatedandsemiregulatedmarkets.

The US has been the largest pharmaceutical market across the globe. High percexpenditure,increasinggenericizationandgovernmentledinitiativesjustifyittobethe

favoreddestination,asdeemedbytheglobalgenericplayers.

TheUSmarkethasexhibitedCAGRof4.44%fromUSD248toUSD308bnover2005201isprojectedtogrowat1.95%CAGRtoUSD339bnby2015E.

TheGlobalPharmaceutical markethasdeliveredCAGRof7.19%fromUSD605toUSDover20052010,andisprojectedtogrowat5.05%CAGRtoUSD1,095bnby2015E.

ConducivefactorsforgenericswillcausesignificantaccrualofbenefitstoGIL:Confluenceofcon

factorsforgenericswillenableittobecomethepreferredpartnerforglobalpharmaplayers,onb

itsapprovedfacilities,proventechnicalandmanufacturingexpertiseaidedbystrongqualityfocus

Inordertocountertheglobaleconomicslowdown,theUSfederalgovernmenthadpassHealthcare

Reforms

bill

(2010),

with

the

objective

of

curtailing

its

healthcare

budget.

With stepwise implementation of this bill, we expect to see emergence of strong gebrandsalongwithhighermarketpenetrationacrossmarketsandtherapeuticsegments.

Reduced R&D productivity and depleting pipelines of global pharma majors, aggravatincreasinglystringentcriteriaoftheregulator(USFDA)favorglobalgenericization.

The marketshare of Generics has increased from 13.5% (2004) to 18.4% (2010),projectedto increaseto24.5%by2015E.Similarly, in termsoftotalprescriptionsdispe

Genericshasincreasedfrom54.1%(2004)to72.8%(2010),andwebelievethisnumber

increaseto84.8%by2015E.

Exhibit6: USandGlobalPharmaMarket Exhibit7:Strongfocusuponregulatedmarkets(US&EU)

Source:IMS,NetworthResearch Source:Company,NetworthResearch

248308 339

605

856

1,095

0

200

400

600

800

1,000

1,200

2005 2010 2015E

USDbn

USPharmaMarket(USDbn) GlobalPharmaMarket(USDbn)0.0

0.1

0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY

Ind ia NorthAm eri ca EU L ati nAmeri ca AMEA

Received FDA approval for

Metformin (500 mg, 850 mg &

1000 mg), and Ibuprofen (200

mg)

Commenced supplies of

Metformin (Apr11) and

Ibuprofen (Jul11) in the US

market.

Naproxen sodium supplies to

initiatebyMarApr12.

IbuprofenRxUSFDAapplication

filed in Q3FY12, supplies to

commencesoon

after

approval.


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Revenue contribution of Active

Pharmaceutical Ingredients (API)

to total revenue has gradually

reducedfrom38to37%overFY08

11.Ongreatercaptiveuse, this is

projected to further fall to 22%

over FY1113E. (% contribution to

Standalonerevenues)

Synchronizedcapacity

augmentation

in

API

and

PFI

to

support

momentum

grow

ActivePharmaceuticalIngredients(API):

Core strength strong technological capabilities with worldclass (regulatorappproductionfacilitiesresultedingenerationofdiversifiedandpotentportfolio.

APIPortfolioParacetamol

Ibuprofen

MetforminHCl

Guaifenesin

Methocarbamol

PhenazopyridineHCl

FormidablepresenceintheglobalAnalgesicmarketonlysettostrengthengoingforward ParacetamolParacetamolremainsthelargestproductbyvolume(58%)globally.Red

competition(exitofRhodia,France)andincreasinggenericsexposureonaccountof

ofpatentedproductTylenol(McNeil,USA)augurswellforthegenericplayersandit

drugsupplierslikeGIL.

Ibuprofen Robust economies of scale and highquality standards have allowedemerge as one the few global players controlling the productsegment. Incr

capacities worldwide would create price pressure over the mediumterm but ge

attractiverealizationsultimately.RecentlyaddedcapacitiesbyIOLoverthepastfew

resulted

in

a

squeeze

in

prices

but

that

phase

has

passed.

BASF

and

Albemarle

pubraisedpricesbetween8% 12%inSept11.

Metformin(Biguanide) Metforminisoneofthemostpopularproductsinthenondiabetessegment(projectedtogrowfromUSD24bnto55bnoverFY1119E).Thenu

ofdiabeticpatients isestimatedtogofrom246mn(2008)to380mn(2025)world

Increasing demand and higher realizations in Metformin would enable GIL to ge

strongthrustinthisproductgoingforward.

Exhibit8:%MarketShareofGenericsv/sBranded Exhibit9:%TotalPrescriptionsdispensed


13.5

14.5

15.5

16.2

16.9

17.4

18.4

19.6

20.7

21.9

23.2

24.5

86.5

85.5

84.5

83.8

83.1

82.6

81.6

80.5

79.3

78.1

76.8

75.5

0

10

20

30

40

50

60

70

80

90100

2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E

(%)

Generics Branded

54.1

57.6

61.2

65.3

69.6

71.8

74.2

76.4

78.7

80.7

82.7

45.8

42.2

38.7

34.4

30

27.7

26.7

23.6

21.3

19.3

17.3

0

10

20

30

40

50

60

70

80

90

100

2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1E 2 01 2E 2 01 3E 2 01 4E 2

(%)

Ge ne r ic s B ra nd ed


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Revenue contribution of

Pharmaceutical Formulation

Intermediates (PFI) which has

gradually reduced from 58% to

38%overFY0811seentostabilize

at 38% over FY1113E. (%contributiontoStandalonerevenues)

PharmaceuticalFormulationsIntermediates(PFI):

Strongproductandserviceoffering:

Pioneeredcommercializationofformulationintermediates PossessesoneofthelargestPFImanufacturingfacilityinGagillapur(AP,India) The manufacturing facility uses highshear and fluidbed granulation processes with

batch,thelargestintheindustry

SignificantlylowertestingnormsandregulatorycostsalongwithfacilitateddocumentatioproductclearancesaresomeadvantagesforGILsclients

Exhibit10:ActivePharmaceuticalIngredients Capacityexpansion Exhibit11:ActivePharmaceutical Ingredients RevenueGrow


Exhibit12:PharmaFormulationIntermediates Capacityexpansion Exhibit13:PharmaFormulationIntermediates RevenueGrowth


720 1,200

960

2,000

0

500

1,000

1,500

2,000

2,500

Current Expanded

Guaifenesin Metformin

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,0009,000

10,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E F

INRmn

ConsoldtdRevenues(INRmn) API(INRmn)

8,400

18,000

0

2,0004,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Current Expanded

Tonsperannum

01,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E F

INRmn

Consoldtd Revenues(INRmn) PFI(INRmn)


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PFIsmanufactured(singleactives) PFIsmanufactured(multipleactives)Paracetamol ParacetamolandChlorpheniramineMaleate

Ibuprofen ParacetamolandDiphenhydramineHCl

MetforminHCl

Paracetamol,

Chlorpheniramine

Maleate

and

Guaifenesin Phenylephrine

Methocarbamol GuaifenesinandEphedrineHCl

Gemfibrozil IbuprofenandPseudoephedrineHCl

CiprofloxacinHCl TrimethoprimandSulphamethoxazole

Naproxen

Analgin

PhenazopyridineHCl

CapacityexpansionswithintheAPIandPFIdivisionstofuelrevenuegrowth

Recently the company commenced making aggressive capacity expansions at its AP(Jeedimetla,AP, India)andPFI facilities(Gagillapur,AP, India).WhileAPIexpansionhas

completed and commissioned, PFI and FD are expected to be completed by Apr12

commissionedbyJune12E.

This strategic expansion in API will enable it to consolidate its presence and emeformidablesupplierofFD;greaterscalestoensuresecurity,consistencyandquality.

However,greatercapacitiesofPFIwouldenablestronggrowth inexternalsales to itsclients.Thiswillallow ittoenter into incrementalcontracts,evenpenetratenewmark

forgingnovelpartnerships.

TheAPIsegmenthasdeliveredrevenueCAGRof21.9%toRs1,527.9mnoverFY0811,andispro

todeliverCAGRof7.9%toRs1,778.7mnoverFY1113E.

ThePFIsegmenthasdeliveredrevenueCAGRof6.5%toRs1,569.3mnoverFY0811,andisprojec

exhibitrevenueCAGRof38.0%toRs2,989.6mnoverFY1113E.

CRAMSAlliancewithAjinomoto-OmniChemtoensurelong-termrevenuevisibil

Patentexpiry of blockbuster drugs, governmentencouraged reforms and growing mclass population will compel the Big Pharma MNCs to provide quality and affo

medication. This will spur demand for intermediates and finished products from Em

Markets,generatingbuoyancyintheoutsourcing(CRAMS)industry.

This would primarily prove beneficial for players in India; a country which has the hnumberofUSFDAapprovedplants(200+:asofNov11)outsidetheUS.

Exhibit14:IndianCRAMSmarket Exhibit15:GlobalCRAMSmarket


2.5

3.8

7.6

0

1

2

3

4

5

6

7

8

2009 2010 2012E

USDBillions

58

67

85

0

10

20

30

40

50

60

70

80

90

2009 2010 2012E

USD

Billions


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Technological and manufacturing capabilities, economies of scale (regulatorappfacilities)backedbyoperationalexpertisewillallowGILtoemergeastheprimebeneficia

JV with OmniChem would allow GIL to focus upon novel products (API, PFI and FD)therapysegmentsandtapnewclientsacrossgeographies(especiallythedevelopedmark

JVMilestones Approx.Date

ContractualAgreement H2CY2011

Completionofexpansion H1CY2013

Pilotbatches H2CY2013

Simplemolecules (Intermediaries) CY2013

Regulatoryapprovals CY2014

Fullcapacityproduction CY2015

UpcomingfacilityinAP,India:

TheJVwiththeBelgianpartnerwillbebasedinthePharmacitySEZatVishakhapatnam,AMutuallybeneficial:

LeverageGILstechnologicalskillsandproductioncapabilities GainfromOmniChemsextensiveproductportfolioandexistingclients

Productsinfocus:

Firstly, JV will produce APIs and Intermediaries (CVS, CNS and Oncology) for patentebrandedproducts.

Subsequently,JVwillpursuesecondgenerationmanufacturingprocessesanddevelopNthefuture.

Lateron,GILwillproduceanddistributeformulations(FinishedDosages)fromtheJVsAPTargetmarkets:

TheJVwouldprimarilyfocusuponregulatedmarketssuchasUS,Canada,andEU.


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Themostpopularanalgesicglobally,used to treatmany conditions suchasheadache,muscleaches,arthritis,

backache, toothaches, colds, and

fevers.

Relievespaininmildarthritisbutnoeffect on underlying inflammation

andswellingofthejoint.

A nonsteroidal antiinflammatorydrug (NSAID) that works by reducing

hormones, that causes inflammation

andbodypain.

Usedtoreducefeverandtreatpainorinflammation caused by manyconditions such as headache,

toothache, back pain, arthritis,

menstrualcramps,orminorinjury.

The most effective and economicalnoninsulin medicine used for

treatmentoftypeIIdiabetes.

Sometimes used in combination withinsulin orothermedications, but it is

notusedfortreatingtypeIdiabetes.

An expectorant used to reduce chestcongestion caused by the common

cold, respiratory infections and/or

allergies.

A nonsteroidal antiinflammatorydrug(NSAID)whichreduceshormones

that causes inflammation and body

pain.

Used to treat pain or inflammation causedbyconditionssuchasarthritis,

ankylosing spondylitis, tendinitis,

bursitis,gout,ormenstrualcramps.

StrongProductPortfoliotogeneraterobusttractionandproviderevenuevisibi

Paracetamol(Acetaminophen):

Thecurrentglobalmarketfortheproductis100,000tonsperannum(TPA),andisexpecgrowat2%forthenext45yearsreaching110,000TPA.

Withplanstoexpanditsbulkdrugmanufacturingcapacitybyapprox.20,000tonsbyFY1(expectedtocomeonstreambyFY15E)takingitstotalcapacityto30,000tons,Granule

tocapture27%marketshareoftheglobalmarketbyFY17E(fromthecurrent12% aid

strategicexternalsourcing).

We believe that this expansion in bulk drug manufacturing capacities will generatescalesinParacetamol(FinishedDosages)andforgeincrementalcontractswithMNCphar

Ibuprofen:

Currentglobalmarketstandsat30,000TPA,primarilycontrolledbyfiveglobalmajors,expectedtogrowat56%overthenext45years. With major traction coming from manufacturing Finished Dosages, GIL plans to increa

globalmarketsharefrom12%(current)to17%byFY17E.

Metformin:

Theglobalmarketsizeiscurrentlyat30to35,000TPA,slatedtogrowat10%throughFY1 Backedby inhousemanufacturing(2,000TPA)andstrategicsourcingfromexternalsup

currentlyGILhasa12%globalmarketshare,andaimstogarner26%marketsharebyFY1

Guaifenesin:

Thisdrugiscurrentlybeingsuppliedtodevelopedmarkets(majorlysupplyingtoUS>50% The growing popularity can be substantiated by GILs expanding orderbook and incr

capacities.

Naproxen:

CurrentlysupplyingtheCanadianmarkets,GILwillsoonstartcateringtotheUSmarketto IntheseearlystagesGILsourcesthebulkdrugsexternally,andexpectsasubstantialup

demandwithinthenextcoupleofyears.

Products CurrentCapacity(Mtpa) CurrentCapacityUtilizations(%)

Paracetamol 10,000 90.0

Ibuprofen 4,800 80.0

Guaifenesin* 720 70.0

Metformin 2,000 100.0

*This table depictspreexpansion capacity of Guaifenesin. Postexpansion the current capacity stands at

Mtpa;theUtilizationsfiguresfortheexpandedcapacityarestillbeingcalculated.


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FinancialHighlights:

Capacityaugmentationandincreasingutilizationexpectedtoboostrevenuegrowth:Backedbyfirmordersfromglobalpharmamajors,GILsAPIcapacityaugmentationhasa

beencompletedandcommissioned;thePFIandFDcapacityaugmentation isexpected

completed by Apr12Eand commissioned by Jun12E. (Capacity augmentations being b

field preclude the necessity for obtaining regulatory approvals before generating reve

Increasing utilizations aided by higher (blended) realizations will generate buoyant re

growth.

Operatingefficiency, portfolioenhancementtoboostprofitsandstrengthenBalanceShWe

expect

robust

uptick

in

margins

on

back

of

proficient

raw

material

sourcing,

operaefficiencyandcompleteverticalintegration.ByFY13E,operatingmarginwillimproveto

(11.8% FY11),whilenetmarginwouldjumpto5.9%(4.4% FY11).

Inspiteoftheconcurrent(debtfunded)expansion,strongoperationalefficienciesand

cash flowswillenable ittoturnFCFpositive fromFY13E,andaugmentthe Interestcov

from 4.5 (FY11) to 5.8 by FY13E. On account of increasing profit margin and imp

utilizations, we will see ajump in the RoNW from 9.9 (FY11) to 19.1%, and RoCE from

(FY11)to18.9%byFY13E.

Exhibit16:GrossBlock&NetDebt Exhibit17:Revenue&Growth


Exhibit18:EBITDA,EBITDAM,ROCE Exhibit19:APAT,APATM,ROE


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E

INRmn

GrossBlock(Rsmn) NetDebt(Rsmn)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


INRm

n

Revenue(INRmn) Growth(%)

0

2

4

6

8

10

12

1416

18

20

0

200

400

600

800

1,000

1,200

June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12EMar'13E

(%)

INRmn

EBITDA(INRmn) EBITDAM(%) ROCE(%)0

100

200

300

400

500

600

June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12EMar'13E

INRmn

APAT(INRmn) APATM(%) RONW(%)


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Risks&Concerns:

Slowerthanexpectedrateofplantutilization:Withsignificantrampupinthemanufaccapacities

expected

to

go

on

stream

soon,

we

assume

that

the

capacity

utilizations

move up substantially, within the next couple of quarters. Lower incremental orders

leadtoslowerincreaseinutilizations,posingdownsiderisktoourearningsestimates.

Operationalefficiencies:Giventheglobalcompetitivescenario,weassumethatthecomwill optimize its COGS alongwith otheroverheads. Anyslippageon this count maywe

uponitsmarginsandcashflowsandcompetitivenesstoforgenovelalliances.

Debtservicingcapacities:WeexpectGILtomanagetheleverageonitsbooks,inlieuoffinanced capacity expansions. Focusing upon generating incremental capacity utilizatio

acute management of its working capital will be crucial in maintaining its debtse

capabilities.

Exhibit20:D/EandInterestCoverageratio

Source:Company,NetworthResearch

0

1

2

3

4

5

6

7


x

D/E Ratio(x) Int.Coverage Ratio(x)


12/16

nitiatingCoverage

Valuation:

With confluence of positive macrofactors and an increased thrust towards an enriched offerin

believe

the

company

would

deliver

robust

revenue

CAGR

of

34.5%

to

Rs

8,731.5mn

over

FY1

Highercontribution from finishedproductsdriving its revenuegrowth,robustoperationaleffici

andcompleteverticalintegrationwillboostprofitabilitygoingforward,growingfromRs208.9mn

508.3mnoverFY1113E(CAGRof55.9%).

Thestockcurrentlytradesat3x itsFY13Eearnings(EPSRs23.4).Webelievethatwithinthe

years,GILwillemergeasastrongsupplieroffinisheddosagesintheglobalmarket.AtCMPofRs7

initiate coverage with Buy recommendation with a 1year price target of Rs 117 (5x FY13E

implyinganupsideof67%.

Exhibit21:P/EPS Exhibit22:P/BV


0

20

40

60

80

100

120

140

160

180

Jun

05

Sep

05

Dec05

Mar06

Jun

06

Sep

06

Dec06

Mar07

Jun

07

Sep

07

Dec07

Mar08

Jun

08

Sep

08

Dec08

Mar09

Jun

09

Sep

09

Dec09

Mar10

Jun

10

Sep

10

Dec10

Mar11

GIL P/E 1 P/E 2.5 P/E 5 P/E 7.5 P/E 10 P/E 12.5

0

20

40

60

80

100

120

140

160

Jun

05

Sep

05

Dec05

Mar06

Jun

06

Sep

06

Dec06

Mar07

Jun

07

Sep

07

Dec07

Mar08

Jun

08

Sep

08

Dec08

Mar09

Jun

09

Sep

09

Dec09

Mar10

Jun

10

Sep

10

GIL P/BV 0.25 P/BV 0.50 P/BV 0.75 P/BV 1.00 P/BV 1.25 P/BV


13/16


14/16

nitiatingCoverage

nnexures:

Annexure-I

Companyprofile:

Granules,startedoffasa bulkdrugmanufacturer(Paracetamol), andstrategicacquisitionsandstrong

hasallowed

it

to

develop

enviable

technological

and

manufacturing

capabilities.

Based

upon

which

G

emergedasakeysupplierofAPIandPFItoeminentclientsacrossregulatedandsemiregulatedmarkets

Strongmanufacturingcapabilities Dedicatedfocusupon(processandproduct)R&D Modernproductionfacilitiesapprovedbyglobalregulatorybodies(USFDAandUKMHRA) Primefocusupontimelydeliveryofhighqualityproducts Competitiveregulatorycomplianceskills

Exhibit22:ManufacturingFacilities

Type FacilityLocation Product Capacity(Mtpa) Approvals

API

Bonthapally

Paracetamol

10,000

U.SFDA,

EDQM,

Infarmed

(EU),

WHO

GMP

Jeedimetla Metformin 2,000

U.S. FDA, EDQM, KFDA, HHA (Germany),

GMP

Guaifenesin 1,200

Methocarbamol 180

PhenazopyridineHCl 48

Jingmen,Hubei Ibuprofen 4,800

U.S. FDA, MHRA, EDQM, TPD Canada,

RussianHealthAuthorities

PFI Gagillapur PFI 16,800 U.S.FDA,TGA,Infarmed(EU),WHOGMP

Jeedimetla PFI 1,200 HHA(Germany)

FD Gagillapur FD 18billionunits U.S.FDA,TGA,Infarmed(EU),WHOGMP

Source:Company,NetworthResearchThe concerted benefits allow GIL to consistently deliver worldclass quality. Leveraging upon this

competencehasenabledGILtoforgeintegralallianceswithseveralbigpharmaceuticalplayersfromreg

markets(USandEU).Consistencyinproductqualityisthetoppriorityforitsallies,givingGILsecurityin

ofstrengtheningalliancesandreasonablepricingpower.

Annexure-II

Keymanagement

personnel:

Dr.C.NageswaraRao,Chairman

He is a nationally renowned surgeon with fifty years of professional experience. He has been very ac

several medical fraternities and served as the Chairman of the Andhra Pradesh Medical Council. He

member of the All India Medical Council, a Syndicate Member of Nagarjuna University and a Direc

HindustanAntibioticLimited.HeholdsanM.S.inSurgery&Urology.

Mr.Krishna

Prasad,

Managing

Director

He isatechnocratwith30yearsofexperience inthepharmaceutical industry. In1984,heestablished

LabsLtd,oneofthe largestmanufacturersofParacetamol intheworld.Mr.Prasadpioneeredtheconc

commercializing Pharmaceutical Formulation Intermediates (PFI) and established Granules India to pr

PFIs. Withhis leadership,Granules is among the premierpharmaceutical companies in the worldand

footprintinover50countries.

Mr.L.S.Sarma,Director

He is a nationally recognized executive in the financial industry. During his career, he served as a G

Manager at Industrial Development Bank of India (IDBI), Director of ECGC and Dena Bank. In additi

worked for the International Trade Centre, as an Export Credit Consultant. He currently serves as a

memberatHexawareTechnologiesLimited.


15/16

nitiatingCoverage

Mr.A.P.Kurian,Director

HeservedastheChairmanofAMFI.HestartedhiscareerattheRBI.Overthenext20years,heworke

UTIholdingpositionsofDirector Investments,DirectorPlanningandDevelopmentandservedastheExe

Trustee(equivalent

to

Managing

Director)

from

1987

to

1993.

He

is

on

the

Board

of

National

Stock

Exc

ExecutiveCommitteeofNSDLandseveralotherCommitteesassociatedwithMutualFundsandCapitalM

Mr.ComandurParthasarathy,Director

HeisoneofthefoundersofKarvy.AstheChairmanofthegroup,hehasbeenresponsibleforbuilding

intooneofIndiastrulyintegratedfinancialservicesorganizations.HeisafellowmemberoftheICAIa

withgraduatedegreesinScienceandLaw.

Mr.KrishnaMurthyElla,Director

He is the chief promoter of Bharat Biotech, a premier biotech company. As Managing Director of

Biotech,Dr.Ellahasworkedwith theprestigious GatesFoundationand revolutionized thevaccinewo

introducing$1/doseantidiarrheavaccine.Dr.EllawaspreviouslypartoftheResearchfacultyattheM

UniversityofSouthCarolinaCharleston and wasawardedhisDoctorate from theUniversityofWisc

MadisoninMolecularBiology.

Mr.ArunRao,Director

HeistheExecutiveDirectorofAkinLaboratoriesPvt.Limited,aFormulationmanufacturingCompany.

memberoftheCentralExecutiveCounciloftheIndianPharmaceuticalAssociation.HeisalsoontheBo

ESPIIndustriesandChemicalsPvt.Limited,a leadingmanufacturerofantacids inIndia.Mr.Rao isaqu

ChemicalEngineerfromtheUniversityofMadraswithaPostgraduatedegreeChemicalEngineeringfro

IllinoisInstituteofTechnology,Chicago,USA.

Mr.HarshaChigurupati,ExecutiveDirector

He has been with GIL since June 2005. As Chief Marketing Officer, he was instrumental in Granules

verticallyintegrated business strategy. During his tenure, Granules India gained nearly 100 cust

including several multinational companies that constitute a large portion of Granules Indias sale

ChigurupatihasaBachelorsofScienceinBusinessManagementfromBostonUniversity.

Dr.Bhaskar

Krishna

Arumugam

Chief

Executive

Officer

HehasbeenwithGranulessince2007,has launchedapanorganizationoperationalexcellenceprogra

formedajointventurewithAjinomotoOmniChem.HepreviouslyworkedatEastmanChemicalCo.Kings

variousroles.HehasreceivedhisB.TechinChemicalEngineeringfromTheIIT Chennai,MBAfromthe

SchoolofBusinessatDukeUniversityandPhD.fromPurdueUniversity.

Mr.PraneshRajMathurPresidentAPI&ChiefFinancialOfficer

HehasservedasCFOofGranulesforoversevenyears,hasformedthejointventurewithHubeiBiocau

wasalsoresponsibleforimplementinganERPsystem.PriortoGranules,hehasworkedatseveralcom

wherehisresponsibilities included launchinganIPOandraisingfundingformanufacturingplants.He is

hasreceivedhisMBAfromOsmaniaUniversityandhisEMBAfromtheIndianSchoolofBusiness.

Mr.JobyVarugheseJohn Director

Heisaninvestmentprofessionalwith40NorthIndustriesinNYCity.Inhisrole,heisresponsibleforst

investmentsandbusiness initiativesatGranulesandmanyof itsoperatingcompaniesfocusedonChe

Building Materials and General Industrials. He has Bachelors and Masters of Science degrees in Ch

Engineeringas wellas an MBA inFinance.He startedhis career in the chemical industry andspent9

working for Exxon and ExxonShell JV, Infineum. After gaining increasing responsibilities in the

operations, and process & product development, he went on to manage theglobalmanufacturing/b

analysisteamatInfineum.Hehasjoinedthecurrentgroupin2004throughoneoftheiroperatingcom

andduringthisperiod,hehasbeen involved inmanufacturing,purchasing,financial,corporatedevelo

andM&Aroles.


16/16

NetworthResearch:[email protected]

SuryaNayak

AVP

Research

[email protected]

022

30225901

VishalKothari Pharma&Chem. [email protected] 02230225900

JigneshVayda Midcaps [email protected] 02230225904

SuhaniPatel Construction/Cement [email protected] 02230225900

SiddharthDeshmukh Telecom/I.T(Associate) [email protected] 02230225900

Derivatives&TechnicalResearch

AkshataDeshmukh AVPDerivatives&Technicals [email protected] 02230641744

KekinMaru DerivativesAnalyst [email protected] 02230641621

AkhilRathi ResearchAssociate Derivatives [email protected] 02230641680

InstitutionSales [email protected] 02230225902

Keyto

NETWORTH

Investment

Rankings

Buy:Upsideby>15,Accumulate:Upsideby+5to15,Hold:Upside/Downsideby 5to+5,Reduce:Downsideby5to15,Sell:Downsideby>15

Disclaimer: This document has been prepared by Networth Stock Broking Ltd. (NSBL). NSBL is a full service, integrated investment banking, portfolio

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