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%
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.