I first valued Granules India last month based on my screen for high growth companies with low P/E ratio. I found it overvalued by about 25% at the trading price of ₹341.30. The stock stayed flat over the last month and I chose to value it again after the stellar FY21 results.
Numbers and Narratives
Granules India is a small pharmaceutical company that primarily makes its revenues from the sale of high volume – low margin generic drugs in the US and around the world. They are also investing into R&D to improve that core business and venture out into niche products. I expect them to be a high growth company in the near term and maintain their industry average margins in that time.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 18% (21% TTM)
- EBIT margin in year 10 = 18% (18% industry average)
- Initial cost of capital = 9.50%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for Granules India as seen below.
As you can see, the valuation price came out to ₹405.64, about 20% higher than the last traded price of ₹336.70.
Excellent
Thank You!