KRChoksey Research has reaffirmed its "BUY" call on Granules India Ltd, targeting a price of Rs 700, which presents an upside potential of 22.4% from its current market price (CMP) of Rs 572. Despite challenges in the Active Pharmaceutical Ingredient (API) and Pharmaceutical Formulation Intermediates (PFI) segments, KRChoksey maintains an optimistic outlook based on the company's gross margin expansion, strategic product mix, and upcoming product launches in high-growth areas like the Central Nervous System (CNS) and ADHD markets. The research emphasizes a resilient growth strategy, bolstered by new products, facility expansions, and market adjustments, positioning Granules India for future growth despite short-term regulatory and demand challenges.

Key Performance Summary

Revenue Miss Due to API and PFI Decline
Granules India Ltd’s Q2FY25 revenue fell short of expectations, declining 18.7% year-on-year (YoY) and 18.1% quarter-on-quarter (QoQ) to Rs 9,666 million. This decrease is primarily attributed to a drop in API and PFI sales, as well as a notable halt in the company's Gagillapur manufacturing facility operations.

EBITDA and Profit Margins See Variability
EBITDA for Q2FY25 decreased by 4.5% YoY to Rs 2,033 million, with an EBITDA margin of 21.0%. Adjusted Profit After Tax (PAT) dropped by 4.8% YoY to Rs 972 million, reflecting the impact of lower revenue and a decrease in operating efficiency due to lower demand and price pressures in certain product lines.

Gagillapur Facility and Regulatory Scrutiny

The company voluntarily suspended operations at its Gagillapur facility following six Form 483 observations from a U.S. FDA inspection, significantly affecting product supply across multiple markets, including the U.S., emerging, and semi-regulated markets. Regulatory resolution and resumption of production will be crucial for stabilizing revenue in the upcoming quarters.

Gross Margin Expansion Amid Revenue Dip

Despite declining revenues, Granules India Ltd demonstrated a solid improvement in gross margins, expanding by 1,036 basis points YoY to 62.0%. This growth is largely attributed to a favorable shift toward high-margin formulation products in the U.S. market and a reduction in raw material costs.

Revenue Impact by Geography
Geographically, revenue took a hit across multiple regions, with notable declines in Europe (-56.8%) and India (-64.2%), while North American revenue declined only modestly by 4.8%. This geographic performance reflects shifting dynamics in global demand and regulatory headwinds impacting specific regions.

Segment-Wise Performance Overview

Granules India Ltd’s primary revenue segments saw mixed results in Q2FY25:

API Segment: Declined by 53.0% YoY to Rs 1,420 million due to price erosion and high customer inventory levels, especially affecting Paracetamol sales.
PFI Segment: Dropped 48.1% YoY to Rs 756 million, mirroring challenges similar to those in the API segment.
Finished Dosage (FD) Segment: Marginally increased by 1.0% YoY, bringing in Rs 7,490 million, underscoring the resilience of Granules India’s core formulations segment amidst broader challenges.

Future Growth Catalysts

Granules India has outlined several growth catalysts to overcome current headwinds and drive future performance:

Expansion in Genome Valley: Phase 2 expansion in Genome Valley, anticipated to complete by Q4FY25, will add capacity with validation activities scheduled for early FY26.
New Product Launches in CNS and ADHD Markets: The U.S.-based Granules Pharmaceuticals Inc (GPI) site is preparing launches in high-demand therapeutic areas, which will likely bolster future revenue streams.
Controlled Pricing Strategy for Pantoprazole: Granules has adopted a cautious pricing approach for Pantoprazole to capture market share without destabilizing prices, aligning with the company’s strategic positioning in its portfolio.

Financial Outlook and Valuation

EPS Revision and Valuation Metrics
KRChoksey revised Granules India’s EPS estimate for FY26E from Rs 29.0 to Rs 26.4, reflecting regulatory and market challenges. Currently, the stock trades at a PE multiple of 28.2x/21.8x based on FY25E/FY26E EPS, respectively. KRChoksey maintains its PE multiple at 26.5x on FY26E EPS, underscoring the potential for growth driven by new launches, market expansion, and operational improvements.

Growth Projections
KRChoksey expects Granules India to achieve a revenue CAGR of 10.2% and an Adj. PAT CAGR of 27.1% from FY24 to FY26E, driven by the company's strategic initiatives and a gradual recovery in demand for API and PFI products.

Investor Recommendations

Granules India Ltd presents a robust investment opportunity for long-term growth, despite short-term hurdles in regulatory compliance and demand fluctuations:

BUY Rating: The “BUY” recommendation is upheld, with a target price of Rs 700, providing a potential 22.4% upside.
Risk Considerations: Investors should monitor regulatory developments and demand stabilization in key markets, especially in the U.S., Europe, and India.
Conclusion
Granules India Ltd remains a viable growth prospect, leveraging a diversified portfolio, new product introductions, and strategic facility expansions to counteract temporary disruptions. The company’s commitment to regulatory compliance and operational enhancement further reinforces KRChoksey’s confidence in its future trajectory.