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If salt loses its saltiness what will you season it with? –Luke 14:34

26 Apr 2019

STOCK MARKET--India Ratings Revises Granules India’s Outlook to Stable; Affirms ‘IND A+’

Instrument Type
Date of Issuance
Coupon Rate
Maturity Date
Size of Issue (million)
Rating Action
Term loans
July 2025
INR5,912.5 (increased from INR5,500)
IND A+/Stable
Affirmed; Outlook revised to Stable from Positive
Fund-based working capital limits

INR6,720 (increased from INR5,760)
IND A+/Stable/IND A1+
Affirmed; Outlook revised to Stable from Positive
Non-fund-based working capital limits

INR1,470 (increased from INR1,200)
Proposed fund-based working capital limits*

Provisional IND A+/Stable/Provisional IND A1+
Proposed non-fund-based working capital limits*

Provisional IND A1+

* The ratings are provisional and the final rating is contingent upon the receipt of final documents conforming to the information already received.

Analytical Approach: The agency continues to take a consolidated view of GIL and its wholly owned subsidiaries – Granules Pharmaceuticals Inc. (GPI), Granules USA Inc. (GUSA) ,  and Granules Europe Limited (GEL) - while arriving at the ratings.  Among them GPI is engaged in the manufacturing while GUI and GEL is engaged in the marketing of active pharmaceutical ingredients (API), intermediates and formulations.

Slower-than-expected Deleveraging: The Outlook revision reflects GIL’s lower-than-expected deleveraging through FY18 and Ind-Ra’s expectation of net debt/operating EBITDA (net leverage) remaining above 2.0x over FY19-FY20. The annualised ratio stood at 2.92x in 1HFY19 (FY18: 3.13x; FY17: 2.02x) as against the agency’s expectations of 1.5x in FY19. The net leverage deteriorated in FY18 because of lower operating profitability (FY18: INR2.78 billion; FY17: INR3.04 billion) due to higher raw material prices, increased R&D spends, high fixed costs from newly commissioned capacities, and lower realisations due to higher domestic sales.

GIL passed on the rise in raw material prices and diversified the supplier base in1HFY19. Revenue and EBITDA generation from the capacity additions has commenced, and site variation approvals for exports to regulated markets are awaited. In 1HFY19, GIL’s revenue rose 34.3% yoy to INR10.34 billion and EBITDA increased 13.2% yoy to INR1.73 billion while EBITDA margins stabilised at 16.7% (1HFY18: 19.9%; FY18: 16.5%). Also, realisation for ibuprofen increased because of higher selling prices and supply security from the company’s joint ventures.

While GIL’s management has guided for a stable debt profile (1HFY19: INR11.23 billion; FY19: INR9.8 billion) over the near to medium term, Ind-Ra expects GIL’s operating profitability to improve modestly over 2HFY19-FY20 on the back of positive operative leverage from the improving utilisation of expanded active pharmaceutical ingredients (FY18: 66.2%; FY17: 62.2%) and pre-formulation ingredients capacities (55.9%; 57.2%). This will be supported by a sustained demand for existing products and new product launches in regulated geographies, and envisaged cost savings from improved sourcing.

Robust Business Profile: The affirmation continues to reflect GIL’s presence across the value chain for its products and integrated business which enables it to manufacture products at competitive prices. It is one of the largest suppliers of the first-line of defence molecules such as paracetamol, metformin and ibuprofen to regulated markets. Although the company operates in the mature molecule market, the absence of any substitutes in the pipeline and its presence in high-growth therapeutic areas, along with longstanding relationships with global generic players indicate strong business prospects in the medium term. While the top three molecules continue to dominate the revenue streams (FY18: 80%; FY17: 78%), the company has amongst the top five capacities globally in its product segments and it also has a diversified clientele, which partially mitigates the high concentration risk. Improving capacity utilisation, successful commercialisation of the proposed oncology API capacities, key products filings and pipeline in finished dosages will help diversify the company’s revenue streams from mature commoditised products and further strengthen its business profile.

Subdued Asset Turns and ROCEs: Over FY17-FY18, GIL incurred a capex of INR7.63 billion (including maintenance capex) to add 13,000 TPA API capacities for paracetamol and metformin in Bonthapally and 6,000TPA pre-formulation ingredients capacities for paracetamol and metformin in Gagillapur, India. The capex was funded by a mix of debt and equity. Growth in gross block and capex-related debt has caused a significant decline in GIL’s fixed asset turns (FY18: 1.57x; FY17: 1.63x; FY16: 1.92x) and ROCE (10.5%; 16.3%; 18.4%). The company’s integrated oncology and high potent/multiple API facility in Vizag, is nearing completion and is regulatory approvals for commencing manufacturing operations are awaited. At end-September 2018, GIL was awaiting approval from the USFDA for 13 abbreviated new drug applications and 21 drug master files. Higher capacity utilisation from the recently commissioned facilities and approval for un-commissioned facilities in India as well as key products launches may lead to a recovery in GIL’s operating and capital efficiency metrics over the medium term. As per the management, the enhanced capacities are fungible for multiple products.

Adequate Liquidity: GIL’s utilisation of the fund-based limits stood at 74% for the 12 months ended December 2018. The company has well-spread debt repayments and expects to maintain a comfortable debt service coverage ratio for the medium term. However, the net working capital days is long (FY18: 173 days; FY17: 169 days) because of higher inventory (105 days;133 days) and receivables (134 days;108 days) due to a long credit period offered to US and LATAM-based clients. This coupled with high capacity additions has led to negative free cash flow (FY18: negative INR5.3 billion; FY17: negative INR1.67 billion). The agency expects GIL’s working capital days to increase as the company would increase capacity utilisations by pushing sales through a longer credit period. However, GIL has not planned any major capex for FY19-FY21, which will lead to a modest improvement in free cash flow over the medium term. The company’s ability to control the working capital cycle to augment capacity utilisation would be a key monitorable.

Regulatory Concerns: Exports to regulated markets such as the US and Europe accounted for 62% of GIL’s revenue in FY18 (FY17: 67%). Thus, any adverse regulatory actions could affect revenue growth. However, GIL’s manufacturing facilities are compliant as on date.

 The Hyderabad-based Granules India is a leading generic pharma company. The company’s the major part of revenues comes from North America and Europe. Its sales are growing at an average pace of above 40 per cent and EPS is growing at 40 per cent. Technically, it is coming out of 32-week cup and handle formation and it is near to the pivot level. The stock is also trading above the long term moving averages. The golden crossover happened four weeks ago. The cup depth is almost 36 per cent. The MACD is also above the zero line and the signal line. The histogram is suggesting a strong momentum. The institutional investors increased their stake by 23.68 per cent in the March quarter, which shows that the stock is in demand and accumulation is happening. It is meeting almost all the CANSLIM criteria, except ROE. Buy this stock at CMP of Rs.115.40. with a stop loss of Rs.104. The targets are open towards Rs.135 and Rs.148.(Disclaimer--Please consult you analysts before purchasing the share )

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