INDIA InstitutionalResearch

Pharmaceuticals

GRANULESINDIALTD.(GIL)
Enrichedofferingstoboostprofitability

InitiatingCoverage
Rating
TargetPrice CMP Upside Sensex

Date:16February,2012
Analyst: VishalA.Kothari
vishal.kothari@networthdirect.com TelNo.:02230225900

GIL,initiallyamanufacturerofbulkdrugs,hastransformeditselfintoa completesolutionsproviderforglobalpharmamajors.Ithasdeveloped integral global alliances on the back of strong technological expertise andmanufacturingcapabilities,bolsteredbyaptfocusuponqualityand regulatorycompliances.Webelievethatwithinthenext2years,GILwill emergeasastrongsupplieroffinisheddosagesintheglobalmarket.

BUY
` 117 ` 70 67% 18202

Strong growth in Finished Dosages (FD) to drive revenues:

With strong intent to upgrade its offering, GIL has increased thrust on finished dosages. With global generics poised for highgrowth; augmenting manufacturing capacities, increasing utilizations and enrichment of its portfolio will assure robust revenue growth. FD revenue grew 13x from mere Rs 78mn in FY09 to Rs 1,032mn in FY11, andprojectedtogrowCAGR75%toRs3,157mnoverFY1113E.

KeyData
BloombergCode ReutersCode NSECode CurrentShareo/s(mn) DilutedShareo/s(mn MktCap(`bn/$mn) 52WKH/L(`) DailyVol.(3MNSEAvg) FaceValue(`) Beta 1USD/` GRANIN GRAN.BO GRANULES 20.1 20.1 1.4/28.4 104/55 11587 10 0.73 49.3

Recent FDA approvals Significant milestone achieved:

Recent FDA approvals have underscored GILs prowess in regulatory compliance protocols, manufacturing skills, consistent ability to deliver worldclass quality. This portrays GIL as an integral partner capable of timelysuppliesofhighquality,regulatorapprovedfinishedproducts.

Synchronized capacity augmentations (API and PFI) to fuel momentum:

Since GIL is now focused more towards FDs, the API segment is projectedtogrowatslowpaceat8%CAGRoverFY1113Eagainst22% CAGR over FY0811, due to greater captive use. But the relatively high marginPFI(pharmaformulationintermediates)segmentisprojectedto growathigherpaceviz.38%CAGRoverFY1113Ev/s6.5%CAGRduring FY0811.

ShareholdingPattern
Promoters FII Others

(%)
40.7 1.6 57.7

RelativePricePerformance
6,200 5,800 5,400 5,000 4,600 0 75 NIFTY GIL 150

Enriched portfolio to boost profitability and strengthen Balance Sheet:

Robust uptick in margins would be observed, primarily aided by proficient raw material sourcing, operational efficiency and complete vertical integration. Improving interest coverage and healthier return ratiostoenableGILtoturnFCFpositivebyFY13E.

5May11

14Jun11

11Dec11

26Mar11

21Nov11

31Dec11

15Apr11

24Jul11

25May11

14Feb11

22Sep11

Valuations:

With increased thrust towards an enriched offering, we believe the companywoulddeliverrobustincomeandprofitof35%and56%CAGR overFY1113E.Thestockcurrentlytradesat3xitsFY13EEPSofRs23.4. AtCMPofRs70,weinitiatecoveragewithBuyrecommendationwith a 1year price target of Rs 117 (5x FY13E EPS), implying an upside of 67%.

13Aug11

12Oct11

20Jan12

6Mar11

4Jul11

1Nov11

2Sep11

PricePerformance(%)
GRANULES NIFTY 1M 11.1 12.8 6M 12.2 9.3 1yr 21.7 0.3

Source:Bloomberg;*Ason15Feb,2012

Exhibit1:KeyFinancials(Consolidated)
Particulars FY09 FY10 FY11 FY12E FY13E NetSales 2,893 4,611 4,752 6,294 8,560 Gr%YoY 59.4 3.1 32.5 36.0 EBITDA 427 614 563 693 1,138 Gr%YoY 43.8 (8.4) 23.2 64.3 APAT 42 304 209 252 508 Gr%YoY 615.2 (31.2) 20.8 101.4 EPS(Adj.) 2.0 14.0 9.6 11.6 23.4 Gr%YoY 615.2 (31.2) 20.8 101.4 P/EPS 35.8 5.0 7.3 6.0 3.0 EV/EBITDA 7.6 4.6 4.9 4.9 3.0 RONW(%) 2.4 16.1 9.9 10.9 19.1

(Rsmn)

ROCE(%) 9.1 11.9 10.4 12.5 19.0

Source:Company,NetworthResearch

InitiatingCoverage

NetworthResearchisalsoavailableonBloombergandThomson

InvestmentRationale:
EnrichingitsOfferingsrealigningitsportfoliotowardsFinishedDosages(FD)
LeveragingitssoundtechnologicalknowledgeandmanufacturingskillsinAPIandPFI,GILhas increaseditsthrustonFDwithintenttoenrichitsbasketofofferings. Backed by strong vertical integration, the increased thrust on downstream products would generatestrongrevenuegrowthalongwithrobustprofitability. Exhibit3:FinishedDosagesRevenueGrowth
10,000
18

Revenue contribution of finished dosages to total revenue grew from 3% to 25% over FY0911 and seen to grow to 40% over FY1113E. (% contribution to Standalonerevenues)

Exhibit2:FinishedDosagesCapacityExpansion
20 18 16

9,000 8,000 7,000

INR mn

BnTabletsperannum

14 12 10 8 6 4 2 0 Current Expanded 6

6,000 5,000 4,000 3,000 2,000 1,000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 ConsoldtdRevenues(INRmn) FD(INRmn) FY11 FY12E FY13E

Source:Company,NetworthResearch

Source:Company,NetworthResearch

Favorableglobalscenariotoaidpositivemomentumgoingforward Drugs having a current marketsize topping USD 100bn losing their patentcover over 2010 2015E, sustained implementation of governmentmandated healthcare reforms and the growingneedforaffordablemedicationareprimedrivingfactorsofglobalgenericsdemand. Increasedawarenesswithinthegrowingmiddleclasstogenerateincreasedinclinationtowards lifestyle and preventative medication, and augment demand for costeffective and quality healthcare. Approximately70%oftheglobalpharmaceuticalgrowthisexpectedtocomefromoutsidethe developed markets, on the back of highquality and costeffective supplies coming from emergingmarkets.

InitiatingCoverage

Exhibit4:GlobalPharmaMarket
1,100

Exhibit5:DevelopingandEmergingMarkets
450

1,200

30 25 20
USDbn

400 350 300 250 200 150 100 50 311

350 315

USDbn

605

651

800 600 400 200 0

720

788

819

1,000

856

28

15 10 7 7 7 7 4 2005 2006 2007 2008 Market(USDbn) 2009 2010 GrowthYoY(%) 2015E 5 0

(%)

147

160

151

0 US FY10 EU FY15E EM

Source:IMS,NetworthResearch

Source:IMS,NetworthResearch

Genericspoisedforhighgrowthacrosstheglobe Robust growth coming from dual factors: Major thrust (60%) to be provided by increasing penetrationrates,whiletherest(40%)wouldbepropelledbynewlyavailablegenerics. Increased generic penetration would come from the ballooning middleclass population, whereinhigherawarenessandexpandingdisposableincomeswouldencouragethemtogoin forlifestyleandpreventativemedications(highmargintherapies).
FinishedDosagesportfolio(Singleactives) Paracetamol Ibuprofen Guaifenesin MetforminHCI NaproxenSodium Diphenhydramine FinishedDosagesportfolio(MultipleActives) IbuprofenandMethocarbamol IbuprofenandPseudoephedrineHCI Ibuprofen,PseudoephedrineHCIand ChlorpheniramineMaleate ParacetamolandDiphenhydramineHCl ParacetamolandMethocarbamol ParacetamolandCodeinePhosphate Paracetamol,PhenylephrineHCland ChlorpheniramineMaleate Paracetamol,PhenylephrineHCland DextromethorphanHBr ParacetamolandDiphenhydramineHCl Paracetamol&PhenylephrineHCI

WebelievethatoverCY1015E,theshareofpatenteddrugswouldfallfrom64%to53%;while theshareofgenericsisexpectedtorisefrom27%to39%.(Source:IMS;NetworthResearch) StrongerfocusuponFinishedDosagesadvancingalongthevaluechain Capacityexpansionandgreaterutilizationstoaugmentscales:Strategiccapacityexpansions across verticals (FD along with API and PFI) are expected to be completed by Apr12E. (Production API commenced; PFI & FD Jun12E). Increasing utilizations of expanded (regulatorapproved)capacitiesandbenefitsofgreaterscalestokickinQ2FY13Eonwards. Realignment of product portfolio would generate strong revenue growth and margins: Strategic reorientation of its portfolio, with a bias towards downstream finished products, assuresbuoyantrevenuegrowthalongwithrobustmargins. TimedentryintoGlobalgenerics:Withglobalgenericsdemandpoisedforhighgrowth,GILs timingforentryintoFDcouldnothavebeenbetter.Withanobjectivetograbahigherglobal marketshare, management looks forward to complete the strategic expansion, and increase overallutilization,onbackoffirmcontractsfromitsglobalpharmamajors. TheFinishedDosagessegmenthasgrown13.2xfromRs77.9mntoRs1,032.4mnoverFY0911,andwe anticipaterevenueCAGRof74.9%toRs3,156.7mnoverFY1113E.
InitiatingCoverage

Received FDA approval for Metformin (500 mg, 850 mg & 1000 mg), and Ibuprofen (200 mg) Commenced supplies of Metformin (Apr11) and Ibuprofen (Jul11) in the US market. Naproxen sodium supplies to initiatebyMarApr12. IbuprofenRxUSFDAapplication filed in Q3FY12, supplies to commencesoonafterapproval.

RecentFDAapprovalsSignificantmilestoneachieved
RecentFDAapprovalshavehighlightedtheprowessofthecompanyinregulatorycompliance protocols,manufacturingskills,andconsistentabilitytodeliverworldclassquality. ThisportraysGILasanintegralpartnercapableofsupplyinghighquality,timelyandregulator approvedfinishedproducts,elevatingGILsvaluecontributiontowardsglobalalliances. Denting the mostlucrative pharmaceutical market: Since early days, GIL has maintained unstinted focusuponregulatedmarkets(EUandNorthAmerica),justifyingitsemergenceasareputedsupplierto BigPharmaplayersacrossregulatedandsemiregulatedmarkets. The US has been the largest pharmaceutical market across the globe. High percapita expenditure,increasinggenericizationandgovernmentledinitiativesjustifyittobethemost favoreddestination,asdeemedbytheglobalgenericplayers. TheUSmarkethasexhibitedCAGRof4.44%fromUSD248toUSD308bnover20052010and isprojectedtogrowat1.95%CAGRtoUSD339bnby2015E. TheGlobalPharmaceuticalmarkethasdeliveredCAGRof7.19%fromUSD605toUSD856bn over20052010,andisprojectedtogrowat5.05%CAGRtoUSD1,095bnby2015E. Exhibit7:Strongfocusuponregulatedmarkets(US&EU)
0.5

Exhibit6:USandGlobalPharmaMarket
1,200 1,000 800 1,095 856 605 600 400 248 200 0 2005 USPharmaMarket(USDbn) 2010 2015E GlobalPharmaMarket(USDbn) 308 339

0.5 0.4 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0.0 FY07 FY08 India FY09 FY10 NorthAmerica EU FY11 FY12E LatinAmerica AMEA FY13E FY14E

USDbn

Source:IMS,NetworthResearch

Source:Company,NetworthResearch

ConducivefactorsforgenericswillcausesignificantaccrualofbenefitstoGIL:Confluenceofconducive factorsforgenericswillenableittobecomethepreferredpartnerforglobalpharmaplayers,onbackof itsapprovedfacilities,proventechnicalandmanufacturingexpertiseaidedbystrongqualityfocus. Inordertocountertheglobaleconomicslowdown,theUSfederalgovernmenthadpassedthe HealthcareReformsbill(2010),withtheobjectiveofcurtailingitshealthcarebudget. With stepwise implementation of this bill, we expect to see emergence of strong generic brandsalongwithhighermarketpenetrationacrossmarketsandtherapeuticsegments. Reduced R&D productivity and depleting pipelines of global pharma majors, aggravated by increasinglystringentcriteriaoftheregulator(USFDA)favorglobalgenericization. The marketshare of Generics has increased from 13.5% (2004) to 18.4% (2010), and is projected to increase to24.5% by2015E.Similarly, in terms of total prescriptions dispensed, Genericshasincreasedfrom54.1%(2004)to72.8%(2010),andwebelievethisnumberwould increaseto84.8%by2015E.

InitiatingCoverage

Exhibit8:%MarketShareofGenericsv/sBranded
(%) 100 90 80
85.5 86.5

Exhibit9:%TotalPrescriptionsdispensed
(%)
27.7

34.4

60 50 40 30 20

84.5

83.8

83.1

82.6

81.6

80.5

79.3

78.1

76.8

75.5

70

70 60 50

45.8

80

42.2

38.7

30

90

26.7

23.6

21.3

19.3

17.3 82.7

15.5

16.2

16.9

17.4

18.4

19.6

20.7

21.9

23.2

24.5

20 10 0

13.5

14.5

10

2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E Generics Branded

2004

54.1

30

2005

57.6

2006

61.2

2007

65.3

2008

69.6

2009

71.8

2010 2011E 2012E 2013E 2014E 2015E Branded

Generics

Source:IMS,NetworthResearch

Source:IMS,NetworthResearch

Revenue contribution of Active Pharmaceutical Ingredients (API) to total revenue has gradually reducedfrom38to37%overFY08 11. On greater captive use, this is projected to further fall to 22% over FY1113E. (% contribution to Standalonerevenues)

SynchronizedcapacityaugmentationinAPIandPFItosupportmomentumgrowth
ActivePharmaceuticalIngredients(API): Core strength strong technological capabilities with worldclass (regulatorapproved) productionfacilitiesresultedingenerationofdiversifiedandpotentportfolio.
APIPortfolio Paracetamol Ibuprofen MetforminHCl Guaifenesin Methocarbamol PhenazopyridineHCl

FormidablepresenceintheglobalAnalgesicmarketonlysettostrengthengoingforward: ParacetamolParacetamolremainsthelargestproductbyvolume(58%)globally.Reducing competition(exitofRhodia,France)andincreasinggenericsexposureonaccountofrecall ofpatentedproductTylenol(McNeil,USA)augurswellforthegenericplayersanditsbulk drugsupplierslikeGIL. Ibuprofen Robust economies of scale and highquality standards have allowed GIL to emerge as one the few global players controlling the productsegment. Increasing capacities worldwide would create price pressure over the mediumterm but generate attractiverealizationsultimately.RecentlyaddedcapacitiesbyIOLoverthepastfewyears resultedinasqueezeinpricesbutthatphasehaspassed.BASFandAlbemarlepublically raisedpricesbetween8%12%inSept11. Metformin(Biguanide)Metforminisoneofthemostpopularproductsinthenoninsulin diabetessegment(projectedtogrowfromUSD24bnto55bnoverFY1119E).Thenumber ofdiabeticpatientsisestimatedtogofrom246mn(2008)to380mn(2025)worldwide. Increasing demand and higher realizations in Metformin would enable GIL to generate strongthrustinthisproductgoingforward.

74.2

40

76.4

78.7

80.7

InitiatingCoverage

84.8

15.2

100

Exhibit10:ActivePharmaceuticalIngredientsCapacityexpansion
2,500 2,000 2,000 1,500 1,000 500 0 Current Guaifenesin Metformin Expanded 960 720

Exhibit11:ActivePharmaceuticalIngredientsRevenueGrowth
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 ConsoldtdRevenues(INRmn) API(INRmn) FY11 FY12E FY13E

1,200

Source:Company,NetworthResearch

Source:Company,NetworthResearch

PharmaceuticalFormulationsIntermediates(PFI): Revenue contribution of Pharmaceutical Formulation Strongproductandserviceoffering: Intermediates (PFI) which has Pioneeredcommercializationofformulationintermediates gradually reduced from 58% to 38%overFY0811seentostabilize PossessesoneofthelargestPFImanufacturingfacilityinGagillapur(AP,India) at 38% over FY1113E. (% The manufacturing facility uses highshear and fluidbed granulation processes with 6 MT contributiontoStandalonerevenues) batch,thelargestintheindustry Significantlylowertestingnormsandregulatorycostsalongwithfacilitateddocumentationand productclearancesaresomeadvantagesforGILsclients

Exhibit12:PharmaFormulationIntermediatesCapacityexpansion
20,000 18,000 16,000

Exhibit13:PharmaFormulationIntermediatesRevenueGrowth
10,000

18,000

INR mn INR mn

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 ConsoldtdRevenues(INRmn) PFI(INRmn) FY11 FY12E FY13E

Tonsperannum

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Current Expanded 8,400

Source:Company,NetworthResearch

Source:Company,NetworthResearch

InitiatingCoverage

PFIsmanufactured(singleactives) Paracetamol Ibuprofen MetforminHCl Guaifenesin Methocarbamol Gemfibrozil CiprofloxacinHCl Naproxen Analgin PhenazopyridineHCl

PFIsmanufactured(multipleactives) ParacetamolandChlorpheniramineMaleate ParacetamolandDiphenhydramineHCl Paracetamol,ChlorpheniramineMaleateand Phenylephrine GuaifenesinandEphedrineHCl IbuprofenandPseudoephedrineHCl TrimethoprimandSulphamethoxazole

CapacityexpansionswithintheAPIandPFIdivisionstofuelrevenuegrowth Recently the company commenced making aggressive capacity expansions at its API and (Jeedimetla,AP,India)andPFIfacilities(Gagillapur,AP,India).WhileAPIexpansionhasbeen completed and commissioned, PFI and FD are expected to be completed by Apr12E and commissionedbyJune12E. This strategic expansion in API will enable it to consolidate its presence and emerge as formidablesupplierofFD;greaterscalestoensuresecurity,consistencyandquality. However, greater capacities of PFI would enable strong growth in external sales to its global clients.Thiswillallowittoenterintoincrementalcontracts,evenpenetratenewmarketsby forgingnovelpartnerships. TheAPIsegmenthasdeliveredrevenueCAGRof21.9%toRs1,527.9mnoverFY0811,andisprojected todeliverCAGRof7.9%toRs1,778.7mnoverFY1113E. ThePFIsegmenthasdeliveredrevenueCAGRof6.5%toRs1,569.3mnoverFY0811,andisprojectedto exhibitrevenueCAGRof38.0%toRs2,989.6mnoverFY1113E.

CRAMSAlliancewithAjinomotoOmniChemtoensurelongtermrevenuevisibility
Patentexpiry of blockbuster drugs, governmentencouraged reforms and growing middle class population will compel the Big Pharma MNCs to provide quality and affordable medication. This will spur demand for intermediates and finished products from Emerging Markets,generatingbuoyancyintheoutsourcing(CRAMS)industry. This would primarily prove beneficial for players in India; a country which has the highest numberofUSFDAapprovedplants(200+:asofNov11)outsidetheUS. Exhibit14:IndianCRAMSmarket
8 7 6
USDBillions

Exhibit15:GlobalCRAMSmarket
7.6

90 80 70 60
USDBillions

85 67 58

5 4 3 2 1 0 2009 2010 2012E 2.5 3.8

50 40 30 20 10 0

2009

2010

2012E

Source:IMS,NetworthResearch

Source:IMS,NetworthResearch

InitiatingCoverage

Technological and manufacturing capabilities, economies of scale (regulatorapproved facilities)backedbyoperationalexpertisewillallowGILtoemergeastheprimebeneficiary. JV with OmniChem would allow GIL to focus upon novel products (API, PFI and FD) across therapysegmentsandtapnewclientsacrossgeographies(especiallythedevelopedmarkets). JVMilestones ContractualAgreement Completionofexpansion Pilotbatches Simplemolecules (Intermediaries) Regulatoryapprovals Fullcapacityproduction UpcomingfacilityinAP,India: TheJVwiththeBelgianpartnerwillbebasedinthePharmacitySEZatVishakhapatnam,AP. Mutuallybeneficial: LeverageGILstechnologicalskillsandproductioncapabilities GainfromOmniChemsextensiveproductportfolioandexistingclients Productsinfocus: Firstly, JV will produce APIs and Intermediaries (CVS, CNS and Oncology) for patented and brandedproducts. Subsequently,JVwillpursuesecondgenerationmanufacturingprocessesanddevelopNCEsin thefuture. Lateron,GILwillproduceanddistributeformulations(FinishedDosages)fromtheJVsAPIs. Targetmarkets: TheJVwouldprimarilyfocusuponregulatedmarketssuchasUS,Canada,andEU. Approx.Date H2CY2011 H1CY2013 H2CY2013 CY2013 CY2014 CY2015

InitiatingCoverage

StrongProductPortfoliotogeneraterobusttractionandproviderevenuevisibility

Paracetamol(Acetaminophen): Themostpopularanalgesicglobally, used to treat many conditions such Thecurrentglobalmarketfortheproductis100,000tonsperannum(TPA),andisexpectedto asheadache,muscleaches,arthritis, growat2%forthenext45yearsreaching110,000TPA. backache, toothaches, colds, and Withplanstoexpanditsbulkdrugmanufacturingcapacitybyapprox.20,000tonsbyFY1314E fevers. (expectedtocomeonstreambyFY15E)takingitstotalcapacityto30,000tons,Granulesaims Relievespaininmildarthritisbutno tocapture27%marketshareoftheglobalmarketbyFY17E(fromthecurrent12%aidedby effect on underlying inflammation strategicexternalsourcing). andswellingofthejoint. We believe that this expansion in bulk drug manufacturing capacities will generate strong
A nonsteroidal antiinflammatory drug (NSAID) that works by reducing hormones, that causes inflammation andbodypain. Usedtoreducefeverandtreatpainor inflammation caused by many conditions such as headache, toothache, back pain, arthritis, menstrualcramps,orminorinjury. The most effective and economical noninsulin medicine used for treatmentoftypeIIdiabetes. Sometimes used in combination with insulin or other medications, but it is notusedfortreatingtypeIdiabetes. An expectorant used to reduce chest congestion caused by the common cold, respiratory infections and/or allergies. A nonsteroidal antiinflammatory drug(NSAID)whichreduceshormones that causes inflammation and body pain. Used to treat pain or inflammation causedbyconditionssuchasarthritis, ankylosing spondylitis, tendinitis, bursitis,gout,ormenstrualcramps.

scalesinParacetamol(FinishedDosages)andforgeincrementalcontractswithMNCpharma. Ibuprofen: Currentglobalmarketstandsat30,000TPA,primarilycontrolledbyfiveglobalmajors,andis expectedtogrowat56%overthenext45years. With major traction coming from manufacturing Finished Dosages, GIL plans to increase its globalmarketsharefrom12%(current)to17%byFY17E. Metformin: Theglobalmarketsizeiscurrentlyat30to35,000TPA,slatedtogrowat10%throughFY17E. Backedbyinhousemanufacturing(2,000TPA)andstrategicsourcingfromexternalsuppliers, currentlyGILhasa12%globalmarketshare,andaimstogarner26%marketsharebyFY17E. Guaifenesin: Thisdrugiscurrentlybeingsuppliedtodevelopedmarkets(majorlysupplyingtoUS>50%). The growing popularity can be substantiated by GILs expanding orderbook and increasing capacities. Naproxen: CurrentlysupplyingtheCanadianmarkets,GILwillsoonstartcateringtotheUSmarkettoo. IntheseearlystagesGILsourcesthebulkdrugsexternally,andexpectsasubstantialuptickin demandwithinthenextcoupleofyears.
Products Paracetamol Ibuprofen Guaifenesin* CurrentCapacity(Mtpa) 10,000 4,800 720 CurrentCapacityUtilizations(%) 90.0 80.0 70.0

Metformin 2,000 100.0 *This table depicts preexpansion capacity of Guaifenesin. Postexpansion the current capacity stands at 1,200 Mtpa;theUtilizationsfiguresfortheexpandedcapacityarestillbeingcalculated.

InitiatingCoverage

FinancialHighlights:
Capacityaugmentationandincreasingutilizationexpectedtoboostrevenuegrowth: Backedbyfirmordersfromglobalpharmamajors,GILsAPIcapacityaugmentationhasalready been completed andcommissioned; the PFI and FD capacity augmentation is expected to be completed by Apr12E and commissioned by Jun12E. (Capacity augmentations being brown field preclude the necessity for obtaining regulatory approvals before generating revenues.) Increasing utilizations aided by higher (blended) realizations will generate buoyant revenue growth. Exhibit16:GrossBlock&NetDebt
4,500 4,000 3,500
INRmn

Exhibit17:Revenue&Growth
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E

70 60 50
(%)

3,000
INRmn

40 30 20 10 0

2,500 2,000 1,500 1,000 500 0

June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E

GrossBlock(Rsmn)

NetDebt(Rsmn)

Revenue(INRmn)

Growth(%)

Source:Company,NetworthResearch

Source:Company,NetworthResearch

Operatingefficiency,portfolioenhancementtoboostprofitsandstrengthenBalanceSheet: We expect robust uptick in margins on back of proficient raw material sourcing, operational efficiencyandcompleteverticalintegration.ByFY13E,operatingmarginwillimproveto13.3% (11.8%FY11),whilenetmarginwouldjumpto5.9%(4.4%FY11). Inspiteoftheconcurrent(debtfunded)expansion,strongoperationalefficienciesandrobust cashflowswillenableittoturnFCFpositivefromFY13E,andaugmenttheInterestcoverage from 4.5 (FY11) to 5.8 by FY13E. On account of increasing profit margin and improving utilizations, we will see a jump in the RoNW from 9.9 (FY11) to 19.1%, and RoCE from 10.4 (FY11)to18.9%byFY13E.

Exhibit18:EBITDA,EBITDAM,ROCE
1,200 1,000 800 20 18 16 14

Exhibit19:APAT,APATM,ROE
600 500 400 25

20

INRmn

300 10 200 100 0

June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E

8 400 200 0
June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E

6 4 2 0

EBITDA(INRmn)

EBITDAM(%)

ROCE(%)

APAT(INRmn)

APATM(%)

RONW(%)

Source:Company,NetworthResearch

Source:Company,NetworthResearch

InitiatingCoverage

10

(%)

600

10

INRmn

12

15

(%)

Risks&Concerns:
Slowerthanexpectedrateofplantutilization:Withsignificantrampupinthemanufacturing capacities expected to go onstream soon, we assume that the capacity utilizations would move up substantially, within the next couple of quarters. Lower incremental orders would leadtoslowerincreaseinutilizations,posingdownsiderisktoourearningsestimates. Operationalefficiencies:Giventheglobalcompetitivescenario,weassumethatthecompany will optimize its COGS along with other overheads. Any slippage on this count may weighin uponitsmarginsandcashflowsandcompetitivenesstoforgenovelalliances. Debtservicingcapacities:WeexpectGILtomanagetheleverageonitsbooks,inlieuofdebt financed capacity expansions. Focusing upon generating incremental capacity utilization and acute management of its working capital will be crucial in maintaining its debtservicing capabilities. Exhibit20:D/EandInterestCoverageratio
x 7 6 5 4 3 2 1 0 June'04 June'05 June'06 June'07 June'08 Mar'09 Mar'10 Mar'11 Mar'12E Mar'13E D/ERatio(x) Int.CoverageRatio(x)

Source:Company,NetworthResearch

InitiatingCoverage

11

Valuation:
With confluence of positive macrofactors and an increased thrust towards an enriched offering, we believe the company would deliver robust revenue CAGR of 34.5% to Rs 8,731.5mn over FY1113E. Higher contribution from finished products driving its revenue growth, robust operational efficiencies andcompleteverticalintegrationwillboostprofitabilitygoingforward,growingfromRs208.9mntoRs 508.3mnoverFY1113E(CAGRof55.9%). Thestockcurrentlytradesat3xitsFY13Eearnings(EPSRs23.4).Webelievethatwithinthenext2 years,GILwillemergeasastrongsupplieroffinisheddosagesintheglobalmarket.AtCMPofRs70,we initiate coverage with Buy recommendation with a 1year price target of Rs 117 (5x FY13E EPS), implyinganupsideof67%.

Exhibit21:P/EPS
GIL 180 160 140 120 100 80 60 40 20 0
Sep10 Sep09 Sep08 Sep07 Sep06 Sep05 Jun10 Jun09 Jun08 Jun07 Jun06 Jun05 Dec 10 Mar 11 Dec 09 Mar 10 Dec 08 Mar 09 Dec 07 Mar 08 Dec 06 Mar 07 Dec 05 Mar 06

Exhibit22:P/BV
P/E2.5 P/E5 P/E7.5 P/E10 P/E12.5 160 140 120 100 80 60 40 20 0
Sep05 Sep06 Sep07 Sep08 Sep09 Sep10 Jun05 Jun06 Jun07 Jun08 Jun09 Jun10 Dec 10 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09

P/E1

GIL

P/BV0.25

P/BV0.50

P/BV0.75

P/BV1.00

P/BV1.25

P/BV1.50

Source:Company,NetworthResearch

Source:Company,NetworthResearch

InitiatingCoverage

12

Financials:(Consolidated) IncomeStatement
Y/EMarch
Particulars GrossSales Excise NetSales Otherincome TotalIncome TotalExpenditure RawMaterial EmployeeExpenses EBIDTA(Excl.OtherIncome) EBIDTA(Incl.OtherIncome) Interest ExchangeFluctuation(Gain)/Loss GrossProfit Depreciation ProfitBeforeTax&EOItems ProfitBeforeTax Tax NetProfit NetProfit

(`mn) FY09
9M 2,952 (59) 2,893 10 2,903 2,465 1,765 325 427 437 157 92 188 118 70 70 28 42 42

FinancialRatios
Y/EMarch
Particulars Profitability EBITDAM NPM Return RoE RoCE LiquidityandGearing CashConversioncycle Debt/Equity Interestcoverage PerShare FDEPS BVPS Valuation P/EPS P/BV EV/EBITDA

FY09
9M 14.8 1.5 2.4 9.1 149.7 1.0 2.8 2.0 80.5 35.8 0.9 7.6 5.0 0.8 4.6 14.0 93.1 7.3 0.7 4.9 93.4 0.7 3.6 9.6 101.1 6.0 0.6 4.9 16.1 11.9 100.6 0.6 4.5 11.6 111.2 3.0 0.5 3.0

FY10
12M 4,688 (77) 4,611 11 4,622 3,997 2,862 543 614 625 175 (112) 562 186 376 376 72 304 304

FY11
12M 4,825 (73) 4,752 8 4,760 4,189 2,956 588 563 571 126 (6) 451 183 268 268 59 209 209

FY12E
12M 6,408 (113) 6,294 12 6,306 5,601 4,016 841 693 705 169 536 197 339 339 87 252 252

FY13E
12M 8,731 (171) 8,560 8,560 7,422 5,366 1,121 1,138 1,138 198 941 249 692 692 183 508 508

FY10
12M 13.3 6.6

FY11
12M 11.8 4.4 9.9 10.4

FY12E
12M 11.0 4.0 10.9 12.5 82.9 0.8 4.2

FY13E
12M 13.3 5.9 19.1 19.0 92.5 0.7 5.8 23.4 133.1

BalanceSheet
Y/EMarch
SourceofFunds EquityCapital SharePremium OtherRes(excldg.SharePrem.) NetWorth SecuredLoans UnsecuredLoans LoanFunds DeferredTaxLiability(Net) TotalCapitalEmployed ApplicationsofFunds GrossBlock Less:AccumulatedDepreciation NetBlock CapitalWorkinProgress Investments CurrentAssets,Loans&Advances Inventories SundryDebtors CashandBankBalance LoansandAdvances OtherCurrentAssets subtotal Less:CurrentLiabilities&Provisions CurrentLiabilities Provisions subtotal NetCurrentAssets Forextranslationreserve TotalAssets

FY09
217 1,179 353 1,749 1,660 173 1,834 123 3,706 2,907 476 2,431 20 3 595 631 128 208 11 1,574 308 34 342 1,232 20 3,706

FY10
217 1,179 628 2,024 1,358 109 1,467 170 3,661 3,028 660 2,368 25 3 686 659 135 245 19 1,743 463 29 493 1,250 16 3,661

FY11
217 1,179 802 2,198 1,314 59 1,372 199 3,769 3,226 840 2,386 69 3 751 716 120 270 22 1,879 545 35 580 1,299 12 3,769

(`mn) FY12E
217 1,179 1,022 2,418 1,855 65 1,920 22 4,361 3,387 1,037 2,351 902 1 990 897 63 173 17 2,140 980 53 1,033 1,107 4,361

CashFlowStatement
Y/EMarch
Particulars CashFlowfromOpActivities CashFlowfromInvActivities CashFlowfromFinActivities NetChangeinCash OpeningCashbalance ClosingCashbalance

FY09
9M (122) (74) 216 20 109 128

FY11
12M 454 (213) (255) (15) 135 120

(`mn) FY12E
12M 754 (1,160) 349 (57) 120 63

FY13E
217 1,179 1,498 2,895 2,006 76 2,082 28 5,004 4,150 1,286 2,864 110 1 1,382 1,313 214 394 43 3,346 1,262 65 1,327 2,019 11 5,004

FY10
12M 653 (75) (571) 6 128 135

FY13E
12M 194 22 (65) 151 63 214

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Annexures: AnnexureI Companyprofile: Granules,startedoffasa bulkdrugmanufacturer(Paracetamol),andstrategicacquisitionsandstrongfocus has allowed it to develop enviable technological and manufacturing capabilities. Based upon which GIL has emergedasakeysupplierofAPIandPFItoeminentclientsacrossregulatedandsemiregulatedmarkets. Strongmanufacturingcapabilities Dedicatedfocusupon(processandproduct)R&D Modernproductionfacilitiesapprovedbyglobalregulatorybodies(USFDAandUKMHRA) Primefocusupontimelydeliveryofhighqualityproducts Competitiveregulatorycomplianceskills Exhibit22:ManufacturingFacilities
Type FacilityLocation Product API Bonthapally Paracetamol PFI FD Jeedimetla Jingmen,Hubei Gagillapur Jeedimetla Gagillapur Capacity(Mtpa) Approvals 10,000 U.SFDA,EDQM,Infarmed(EU),WHOGMP U.S. FDA, EDQM, KFDA, HHA (Germany), WHO Metformin 2,000 GMP Guaifenesin 1,200 Methocarbamol 180 PhenazopyridineHCl 48 U.S. FDA, MHRA, EDQM, TPD Canada, MCC, Ibuprofen 4,800 RussianHealthAuthorities PFI 16,800 U.S.FDA,TGA,Infarmed(EU),WHOGMP PFI 1,200 HHA(Germany) FD 18billionunits U.S.FDA,TGA,Infarmed(EU),WHOGMP

Source:Company,NetworthResearch

The concerted benefits allow GIL to consistently deliver worldclass quality. Leveraging upon this core competencehasenabledGILtoforgeintegralallianceswithseveralbigpharmaceuticalplayersfromregulated markets(USandEU).Consistencyinproductqualityisthetoppriorityforitsallies,givingGILsecurityinterms ofstrengtheningalliancesandreasonablepricingpower. AnnexureII Keymanagement personnel:

Dr.C.NageswaraRao,Chairman He is a nationally renowned surgeon with fifty years of professional experience. He has been very active in several medical fraternities and served as the Chairman of the Andhra Pradesh Medical Council. He was a member of the All India Medical Council, a Syndicate Member of Nagarjuna University and a Director of HindustanAntibioticLimited.HeholdsanM.S.inSurgery&Urology. Mr.KrishnaPrasad,ManagingDirector Heisatechnocratwith30yearsofexperienceinthepharmaceuticalindustry.In1984,heestablishedTriton LabsLtd,oneofthelargestmanufacturersofParacetamolintheworld.Mr.Prasadpioneeredtheconceptof commercializing Pharmaceutical Formulation Intermediates (PFI) and established Granules India to promote PFIs. With his leadership, Granules is among the premier pharmaceutical companies in the world and has a footprintinover50countries. Mr.L.S.Sarma,Director He is a nationally recognized executive in the financial industry. During his career, he served as a General Manager at Industrial Development Bank of India (IDBI), Director of ECGC and Dena Bank. In addition, he worked for the International Trade Centre, as an Export Credit Consultant. He currently serves as a board memberatHexawareTechnologiesLimited.

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Mr.A.P.Kurian,Director HeservedastheChairmanofAMFI.HestartedhiscareerattheRBI.Overthenext20years,heworkedwith UTIholdingpositionsofDirectorInvestments,DirectorPlanningandDevelopmentandservedastheExecutive Trustee(equivalenttoManagingDirector)from1987to1993.HeisontheBoardofNationalStockExchange, ExecutiveCommitteeofNSDLandseveralotherCommitteesassociatedwithMutualFundsandCapitalMarket. Mr.ComandurParthasarathy,Director HeisoneofthefoundersofKarvy.AstheChairmanofthegroup,hehasbeenresponsibleforbuildingKarvy intooneofIndiastrulyintegratedfinancialservicesorganizations.HeisafellowmemberoftheICAIandICSI withgraduatedegreesinScienceandLaw. Mr.KrishnaMurthyElla,Director He is the chief promoter of Bharat Biotech, a premier biotech company. As Managing Director of Bharat Biotech, Dr. Ella has worked with the prestigious Gates Foundation and revolutionized the vaccine world by introducing$1/doseantidiarrheavaccine.Dr.EllawaspreviouslypartoftheResearchfacultyattheMedical University of South Carolina Charleston and was awarded his Doctorate from the University of Wisconsin MadisoninMolecularBiology. Mr.ArunRao,Director HeistheExecutiveDirectorofAkinLaboratoriesPvt.Limited,aFormulationmanufacturingCompany.Heisa memberoftheCentralExecutiveCounciloftheIndianPharmaceuticalAssociation.HeisalsoontheBoardof ESPIIndustriesandChemicalsPvt.Limited,aleadingmanufacturerofantacidsinIndia.Mr.Raoisaqualified ChemicalEngineerfromtheUniversityofMadraswithaPostgraduatedegreeChemicalEngineeringfromthe IllinoisInstituteofTechnology,Chicago,USA. Mr.HarshaChigurupati,ExecutiveDirector He has been with GIL since June 2005. As Chief Marketing Officer, he was instrumental in Granules Indias verticallyintegrated business strategy. During his tenure, Granules India gained nearly 100 customers, including several multinational companies that constitute a large portion of Granules Indias sales. Mr. ChigurupatihasaBachelorsofScienceinBusinessManagementfromBostonUniversity. Dr.BhaskarKrishnaArumugamChiefExecutiveOfficer HehasbeenwithGranulessince2007,haslaunchedapanorganizationoperationalexcellenceprogramand formedajointventurewithAjinomotoOmniChem.HepreviouslyworkedatEastmanChemicalCo.Kingsportin variousroles.HehasreceivedhisB.TechinChemicalEngineeringfromTheIITChennai,MBAfromtheFuqua SchoolofBusinessatDukeUniversityandPhD.fromPurdueUniversity. Mr.PraneshRajMathurPresidentAPI&ChiefFinancialOfficer HehasservedasCFOofGranulesforoversevenyears,hasformedthejointventurewithHubeiBiocauseand wasalsoresponsibleforimplementinganERPsystem.PriortoGranules,hehasworkedatseveralcompanies wherehisresponsibilitiesincludedlaunchinganIPOandraisingfundingformanufacturingplants.HeisaCA; hasreceivedhisMBAfromOsmaniaUniversityandhisEMBAfromtheIndianSchoolofBusiness. Mr.JobyVarugheseJohnDirector Heisaninvestmentprofessionalwith40NorthIndustriesinNYCity.Inhisrole,heisresponsibleforstrategic investmentsandbusinessinitiativesatGranulesandmanyofitsoperatingcompaniesfocusedonChemicals, Building Materials and General Industrials. He has Bachelors and Masters of Science degrees in Chemical Engineering as well as an MBA in Finance. He started his career in the chemical industry and spent 9 years working for Exxon and ExxonShell JV, Infineum. After gaining increasing responsibilities in the plant operations, and process & product development, he went on to manage the global manufacturing/business analysisteamatInfineum.Hehasjoinedthecurrentgroupin2004throughoneoftheiroperatingcompanies andduringthisperiod,hehasbeeninvolvedinmanufacturing,purchasing,financial,corporatedevelopment andM&Aroles.
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NetworthResearch:Emailresearch@networthdirect.com SuryaNayak VishalKothari JigneshVayda SuhaniPatel SiddharthDeshmukh AVPResearch Pharma&Chem. Midcaps Construction/Cement Telecom/I.T(Associate) akshata.deshmukh@networthdirect.com kekin.maru@networthdirect.com akhil.rathi@networthdirect.com dealing@networthdirect.com 02230641744 02230641621 02230641680 02230225902 surya.nayak@networthdirect.com vishal.kothari@networthdirect.com jignesh.vayda@networthdirect.com suhani.patel@networthdirect.com siddharth.deshmukh@networthdirect.com 02230225901 02230225900 02230225904 02230225900 02230225900

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