If you are a Granules shareholder as on the record date of August 23, 2022, then you might be able to tender your shares in the buyback offer from the company opening soon. Based on Tuesday’s (September 20) close price of ₹308, the buyback offer of ₹400 per share represents a 30 per cent premium. But for the shareholders, specifically retail ones, the returns from the exercise will be limited to low single digits based on the tendering achieved and resulting acceptance ratio. The promoters, holding 42 per cent of shareholding, have expressed their intention to participate in the buyback as well. An aside that investors should note is that, recently, the promoter group was in the news to sell their stake to PI Industries, which has been refuted by the company.

Buyback considerations

A total of 62.5 lakh shares or 2.52 per cent of shareholding is allowed for buyback which amounts to ₹250 crores. Of the lot, 15 per cent or 9.37 lakh shares are reserved for small shareholders. There are around 2 lakh small shareholders who hold 4.93 crore shares. If 10/20/30 per cent of such retail shares participate in the tender, then the acceptance ratio in this category will be 19/9.5/6.3 per cent, respectively. Applying a 30 per cent return on accepted shares will yield 5.6/2.8/1.9 per cent returns from the buyback. Considering the fall in stock price since January 2021, this modest return may still look attractive for some shareholders. But the final return will still depend on the actual number of shares tendered and the acceptance ratio. The buyback will be open from September 27 to October 11 when eligible shareholders as on the record date can complete the tender process.

About the company

Granules India is a pharma manufacturer operating in APIs, pharmaceutical intermediaries and formulations. After rallying 150 per cent from pre-Covid to January 2021, the stock has declined 14 per cent since then. In this period, Granules India has been impacted by US formulation price erosion and supply disturbances, apart from higher raw material and logistics costs. Its EBITDA margins have declined from 26 per cent in FY21 to 19 per cent in FY22 and 20 per cent in Q1FY23. The recent results commentary shows that while it may be a bit early to say that cost pressures are easing entirely, they may be on a gradual decline. Granules’ management now expects a gradual recovery in EBITDA margins from the cost de-escalation even as peak margins may not be achievable right away. Granules India has posted an average 21 per cent revenue CAGR in the last five years. In the next two years, aided by expanding formulation portfolio, presence in Europe, backward integration in key products (DCDA, a key starting material for metformin) and better availability of paracetamol raw material from China and India, similar high growth can be expected. The stock is trading at 15 times FY23 earnings, which is in line with its one year forward valuation in the last five years. Expected continuation of the revenue momentum of the last five years in the near to medium term and the gradual recovery expected in margins can be tailwinds for the company.