Granules India’s (GRAN) 2QFY18 sales/EBITDA/PAT (before JV profits) at 3.93bn/ Rs 769mn/Rs 355mn were largely in line with EE. However, PAT post JV profits (Rs 403mn) was 21% lower on deferred supplies from the Omnichem JV, resulting in its negligible contribution. Gross margin contracted ~280bps qoq due to higher raw material prices. We expect business expansion going forward with (1) price increases passed on to customers, (2) commercialization of API and PFI expanded capacities, (3) launch of gGlucophage XR, and (4) a low-competition ANDA launch from the Virginia facility. We slash our FY18/FY19E earnings estimates by 13/8%, factoring in a slower ramp-up in Omnichem JV and dilution owing to QIP. We believe the stock is cheap at current valuations and thus reiterate our LONG rating with a Dec’18 TP of Rs 171 set at 19x P/E.
Higher PAP prices hurt margins:
Gross margins slid 200bps qoq on higher raw material prices. Management stated that price increases would be passed on to consumers, but with a 3-6 month lag. Therefore, we expect margins to scale up from 3Q and fully recover by 4QFY18E.
Filing to start translating into revenues
: GRAN has launched Prasugrel (sales of ~US$ 420mn) during the quarter. It is currently a four-player market (vs. our earlier estimate of a 10-player market) and we expect it to contribute ~US$ 2mn in profit sharing. GRAN doesn’t have its own front-end infrastructure, and has tied-up with another company to market the product. On gGlucophage XR (sales of ~US$ 140mn), GRAN has received additional queries to which it would respond soon; therefore, we now expect it to be a FY18 end launch.
Update on complex generics:
GRAN has filed two ANDAs with USFDA from its US facility. Both are niche filings and include: (1) gColcrys (brand sales: US$ 450mn), whose latest patents expire in 2029, and (2) an ANDA focused on the women’s healthcare segment for labor pain management (US$ 60mn drug, TAD in Jan’18). GRAN is confident of getting approval for ANDA with market size of US$ 60mn and expects it be a meaningful opportunity, where its gross margin could be more than 90%.
Omnichem JV to ramp-up in rest of fiscal:
Omnichem generated Rs 350mn in sales and negligible profits during the quarter. Outlook for the JV remains bleak as one of its biggest customers has changed its procurement plans. Management expects FY18/FY19E to be tepid, and growth ramp-up from FY20E.
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