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Pharma continues to lead growth, profitability
With lower than usual growth in Pharma business and declining LSI revenues, JUBILANT sales were 7% lower than our estimates while adj. EBITDA and adj. PAT were in-line as those were 1% and 2%, respectively, higher than our estimates. Pharma business grew by 12% YoY while LSI declined by 5% in Q1FY20. Ban on new approvals and lack of sales in sartans impacted US generic and API sales which were the key reasons for low growth in pharma business. LSI business remains tepid due to low demand and low prices in life science chemicals (LSC) and management guided sluggish demand and pricing scenario to continue in LSC segments and expect improvement only in H2FY20E.
With Rs480m one-offs in Q1, JUBILANT’s operating and overhead costs remained higher in Q1FY20. This has led to 30bps YoY decline in adj. EBITDA margin to 19.5% respectively. Radiopharma, CDMO and allergic extracts maintains growth and margin while API and generics continued to be impacted due to ban on new product approvals in Roorkee (formulations) and Nanjangud (API) plants. EBITDA margin in LSI however increased with improved demand in specialty chemicals and margin. The sustainability of LSI profitability to remain tepid without witnessing growth in Vit-B business globally.
With ban on new approvals, the benefit of new launches and opportunities from shortage of drugs will be limited for JUBILANT. Its anti-allergy and venom businesses although gaining traction post withdrawal of competitions. While Vitamin business benefited from better demand scenario, the lower pricing regime with high volume impacted LSI business. The lack of supply of Vitamin-A & E have negatively impacted the price and demand of Vitamin-B thus reducing the price for the past 5-6 quarters.
JUBILANT raised US$200m debt to repay US$135m prepay debt from IFC Washington, though the event raised total borrowings. Its net debt reduced by Rs1.96bn in Q1FY20. This will result in compression of valuation multiples. We reduced assigned EV/EBTIDA to 5x (from 7x) to Pharma business on FY21E in our SOTP valuations. The current valuation reflects all possible positive developments in the near to medium term. With muted demand offtake in chemical biz (LSI), high leverage and regulatory uncertainties we maintain ‘Reduce’ recommendation and decrease TP to Rs433 (Rs648 earlier).
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