Shares of Granules India, a pharmaceutical firm, picked up steam after reaching a 52-week low of ₹227 apiece in June this year and steadily climbed to the current level of ₹331.65, yielding a 46 percent return to date.
Granules India is a vertically integrated pharmaceutical company. The company manufactures Active Pharmaceutical Ingredients, Pharmaceutical Formulation Intermediates and Finished Dosages, and supplies them to both regulated and semi-regulated markets.
Despite such strong gains in the last six months, domestic brokerage firm Sharekhan has upgraded the rating on the stock from "hold" to "buy" with a target price of ₹400, an upside of 22.32 percent from the stock's previous closing price.
The brokerage believes Granules India is well-poised to benefit from the diversified supply of its Paracetamol API secured away from China in recent quarters.
The management anticipates that paracetamol sales will remain stable in the short term because it has a large number of customers in the US, according to the brokerage.
The company is also gaining market share from other suppliers for paracetamol. In addition to that, the company launched paracetamol in Europe in Q3FY23 and expects sales to ramp up from Q4FY23E, it added.
Meanwhile, the recent price changes implemented by National Pharmaceutical Pricing Authority in Paracetamol and Metformin in India should not cause concern because the company does not sell these formulations in India. The company has announced setting up a green chemical plant soon, whose details are awaited, said the brokerage.
"In Q2FY23, the company witnessed strong revenue and earnings growth, beating our revenue and earnings estimates due to a stronger show in API sales than we anticipated."
“API sales grew by a whopping 73.4% YoY to Rs. 3,303 million in Q2 FY23. This was largely driven by paracetamol sales recovering with improved availability of Key Starting Raw Materials (KSMs) such as PAP,” the brokerage highlighted.
Sharekhan believes the prevalence of flu season in the US and Europe may continue to drive demand for Paracetamol and thereby drive Paracetamol’s sales for Granules India over short to medium term.
The management expects that the China + 1 strategy, besides its ability to pass on price increases to a few customers for Paracetamol, will help safeguard escalated price levels for its PAP API for Paracetamol from China over the medium term.
The brokerage noted that the stock trades at a relatively attractive valuation of 11.7x/10.0x its FY2024E/FY2025E EPS, and it valued the company’s shares at 12.0x while applying it on FY25E EPS.
However, the brokerage laid out some key downside risks for the stock, including a delay in product approvals, delay in easing input prices and the negative outcome of facility inspections by the USFDA, which will affect future earnings prospects.
For the September quarter, the company posted a 79 percent rise in its consolidated net profit to ₹145 crore, aided by robust sales across segments. The company reported a net profit of ₹81 crore in the July-September period of the previous fiscal.
The revenue from operations rose to ₹1,151 crore for the September quarter as compared to ₹888 crore in the similar quarter of last year.
7 analysts polled by MintGenie on average have a 'Buy' rating on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.