Granules

“Granules India is gearing up to become a fully integrated pharmaceutical outsourcing manufacturer once its tableting facility becomes operational by the end of March 2007. Granules India operates on a strong and sustainable business model with the unique concept of manufacturing single and combinational pharmaceutical formulation ingredients, PFIs, the directly compressible granules for use in generic drugs which provides cost advantage to outsourcing players with reduced regulatory hassles.”

“The company is set to enhance margins by focusing on value added product mix by emphasizing more on high margin and high volume products. The firm is forward integrating into finished dosages and dossier fillings and it is backward integrating by creating additional capacities for some strategic active pharmaceutical ingredients, APIs like Naproxen and Aspirin.”

High margin PFIs- the key growth driver

“The United States Food and Drug Administration, USFDA approval for Metformin PFI, Pa
racetamol plant expansion and increased focus on regulated markets are the key growth drivers. Along with a US-based Amneal Pharmaceuticals LLC, it has received an approval for Metformin Hydrochloride tablets. This is the first time that the USFDA has approved an Abbreviated New Drug Application, ANDA with a PFI as the raw material.”

“The new paracetamol plant is getting fully operational by January 2007 which would contribute higher revenues for Q3&Q4 of FY2007. It is increasing its focus in regulated markets like US and Europe in PFIs segment by simultaneously harnessing marketing force in key markets like North America, Latin America, Brazil, Canada and UK.”

Backward and forward Integration - set to become fully integrated outsourcing player
“Granules India is further harness API business through recent acquisition with China-based Hubei Biocause Heilen Pharmaceutical Company (Biocause), the largest manufacturer and exporter of bulk Ibuprofen powder and tablets in China with a capacity to produce 3800 MT and 4 billion tablets per annum. It expects to derive revenues worth Rs 170 million and Rs 352 million in FY2007 & FY2008 respectively from this acquisition.”

“Commencement of 6 billion tableting facility in March 2007 should enable the company to capture the entire value chain and clock higher margins going forward.”
Transition from over-the-counter (OTC) ANDA to prescription generics segment- shifting towards high margin products

“It is in the process of increasing its presence in combination OTC segment and shifting towards combination prescription products in regulated markets. The company's margins are expected to expand on the back of higher realizations in combination products and prescriptions business and lower raw materials cost and savings in expenditure. The company is currently marketing Paracetamol PFI in the OTC space and is selling Ibuprofen, Metformin and Guaifensin in Latin American countries.”

Valuation

“As the company moves into higher value added prescription PFI and tableting revenues, we believe the company would get re-rated. Higher CAGR revenue growth of 48% for the next two years and CAGR profit growth of 67% for the next two years would re-rate the company. We however believe the company would have a higher critical size and access to direct marketers with a stronger product basket by FY 2008E. We, hence rate the stock as a Buy with a price target of Rs 150 based on 8x FY 2008E and a P/S of 0.53x.”