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Quarter marred by one-offs; concerns priced in — upgrade to LONG
Jubilant Life Sciences’ (JUBILANT) 4QFY19 sales at Rs 23.85bn came in line with EE, while EBITDA at Rs 3.58bn was marred by multiple one-offs; adjusting for the same, EBITDA was broadly in line with EE. Adj. recurring PAT at Rs 2.24b fell 6% short of EE. The recent 20% correction in the stock over last three months completely factors in most concerns highlighted in our Mar’19 initiation report (link); these include (a) sluggish growth in the generics business with a warning letter at the Roorkee formulation plant, (b) high concentration risk in the radio pharma business, and (c) lower acetic anhydride realizations. At current valuations of 10x/9x P/E, we believe the risk-reward is favorable, leading us to upgrade the stock to LONG (from ADD) with a Jun’20 TP of Rs 751 (Mar’20 TP: Rs 865) at 12x PE (13x earlier).
Quarter marred by one-offs:
Sales at Rs 23.85bn (+6% yoy/flat qoq) came in line with EE. Gross margins at 59% were hit by inventory adjustments of Rs 370mn, adjusting for which they were flat yoy at 61%, 10bps below EE. EBITDA plummeted 22% yoy/27% qoq to Rs 3.58bn owing to multiple one-offs: (a) IPO expenses of Rs 130mn, (b) penalties to customers of Rs 180mn, and (c) litigation expenses of Rs 190mn. Adjusting for these, EBITDA was broadly in line with EE. Adj. recurring PAT at Rs 2.24bn (+49% yoy/-19% qoq) was 6% below EE, while reported PAT at -Rs 0.99bn was dragged down by stock settlement charges of Rs 2.35bn related to repayment of convertible IFC loans.
CMO biz — Expanded facilities to aid growth:
The CMO business generated revenues of US$ 112mn for FY19. We think amongst all of JUBILANT’s businesses, CMO would lead growth with a 15.5% CAGR over FY19-FY22 driven by (a) a strong order book of US$ 700mn (as disclosed by management in its post earnings conference call for 4QFY18) to be executed over the next five years, (b) increased work shifts at one line of the Spokane facility to 7 from 5 days a week earlier and (c) commercialization of a new Lyo line which would be operational from 2HFY20E.
Pharma, generics & radio-pharma to see sluggish growth:
Generics revenues at Rs 10.24bn were up 27.5% yoy for FY19. Growth was mainly led by an increase in market share of existing products as big generic pharma companies rationalized their portfolios. With portfolio rationalization over and no new approval in sight (owing to pending warning letter at Roorkee and OAI classification of Nanjangud facility), we expect the generics business to remain flat till resolution of USFDA issues, likely by 1QFY21.
Growth for the radio pharma business (ex-Rubyfill) is expected to be largely in line with market growth of 6% as JUBILANT holds a 100% market share in two dominant products viz. DTPA and MAA which together contribute +60% to segment revenues. Also, we are factoring in a gradual ramp-up in Rubyfill and expect it to contribute US$ 10mn/18mn in FY20/FY21E.
Lower acetic anhydride realization to hurt LSI growth:
We expect LSI biz (life sciences ingredient) to see a tepid growth of 2% in FY20 despite expected commercialization of augmented capacities of new acetic anhydride plant in 1QFY20 owing to a) Drop in acetic acid prices by 25% which will eventually result into lower realizations of acetic anhydride (b) slower than expected turnaround in Vitamin B3 prices and demand.
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