HDFC securities has maintained 'Buy' on Granules India with target price of Rs 115 in its report.

Commenting on the investment rationale, the stock broker said, ''Driven by fresh capacities in API/PFI and resumption of OTC product supplies for the US partner, revenues grew 42%YoY to Rs 5.0 billion in 4QFY18. However, steep price increase in key raw materials (ex. Acetic acetate), unfavorable geographic mix and inventory write off led to sharp fall in EBITDA margin from 18% in 3QFY18 to 8.7% in 4QFY18. As a result, reported PAT was at Rs 204 million, down 55%YoY.

GRAN had taken Rs 240mn incremental R&D spend through P&L in 4QFY18, due to new accounting policies. Moreover, there was Rs 120 million inventory write off. Adjusted for these expenses, EBITDA margin was at 18%. The impact of raw material price hike and business mix was only ~300-400bps, in our view.

GRAN has been able to secure gMethergine approval from US FDA in May-18. It's a milestone for the company in formulation space considering the challenges at development stage. GRAN is the second generic player to launch this product in the US. However, contrary to our expectations, gMethergine will be launched with the partner. Hence, we have revised our earnings contribution from this product to 8% in FY19 from 15% earlier. This along with raw material price increase and higher revenue R&D spend has led to 13-17% EPS cut over FY19-20E. 

Although our thesis of GRAN becoming a US formulation player has started playing out, there are several headwinds for margin improvement in FY19. This has resulted into share price fall from Rs 140 to Rs 82. At CMP, the stock is trading at 15.7x FY18E, 11.6x FY19E and 8.6x FY20E, still 50% cheaper to industry peers. We continue to maintain BUY with reduced TP of Rs 115 (12x FY20E).''

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.