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Strong secondary sales continues
J.B. Chemicals & Pharmaceuticals (JBCPL) remains our top pick in the midcap pharma space. We are positive on the company considering that ~43% of its total revenues and >55% of EBITDA comes from domestic formulations with high visibility of strong growth. Secondary data (AIOCD-AWACS) indicates the company has been consistently outperforming industry growth and the outperformance (>1,000bps) has significantly increased over the past four months. This clearly points at strong brand recognition and improvement in fieldforce (MR) productivity. We believe the stock is significantly undervalued at 13.5xFY20E and 11.7xFY21E earnings given its 14.7% earnings CAGR over FY19- FY21E and >7% FCF yield on FY21E. Reiterate BUY.
* Outperformance continues in secondary sales: India business (primary sales) grew 14.5% YoY in FY19 vs industry growth of ~10%. Recent AIOCD data suggests a further pick-up in growth momentum to high double digits (24% in Q1FY20) backed by Cilacar and Nicardia franchise. However, Rantac and Metrogyl growth remained subdued due to high competition and price control. We expect JBCPL to continue to outperform industry growth on primary sales and witness 14% revenue CAGR over FY19-FY21E in India business. This would be driven by continued improvement in MR productivity and traction in new launches.
* Slow but profitable growth in exports: Export revenues have seen strong 24% growth in FY19 on back of favourable currency, traction in the US and RoW businesses. We believe growth will slow down in the coming years assuming constant currency rate and no major product opportunity in the US (such as glipizide in FY19). However, we expect gradual improvement in profitability in exports with better margin in Russia & CIS and RoW markets. We expect export revenues to grow at 5.4% CAGR over FY19-FY21E on a high base mainly led by RoW markets.
* Outlook: Considering the mid-teens revenue growth in India and gradual scale-up in export formulations over FY19-FY21E, we expect 70bps EBITDA margin expansion during the period. This would not only help improve RoIC from 17.2% in FY19 to 20.7% in FY21E, but also generate free cashflow of Rs4bn over the next two years. Large part of the FCF would be distributed to shareholders, thereby improving the return profile.
* Valuations and risks: The stock is attractively valued at 11.7x FY21E earnings and FCF yield of 7.1%. We maintain our BUY rating on the stock with a target price of Rs476/share based on 15x FY21E EPS. The key downside risks are: slowdown in India growth, pricing pressure, and currency volatility.
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