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Lockdown to impact RadioPharma/Allergy in near term
Easing logistics constraints/safety measures for employees to improve plant utilization gradually
Amidst the on-going Coronavirus (COVID-19) pandemic and subsequent lockdowns, we spoke to the management of Jubilant Life Sciences (JLS) to get an update on its business. Key insights highlighted below:
* JLS’ Nanjangud plant would remain shut (as few employees were tested positive for COVID-19) till 10th Apr’20. This facility contributes 7-8% of total sales for JLS. As inventory is available in the system, impact of the shutdown should be minimal.
* RadioPharma and Allergy therapies (33% of sales) have seen some reduction due to lower visits at hospitals/allergists on account of the lockdown. Also, products used in elective diagnosis and procedures are getting postponed.
* For rest of the business, JLS is currently witnessing steady performance. Most of JLS’ businesses being in the essential services category, production at its plants has continued albeit at lower utilization due to logistics constraints.
* We reduce our EPS estimate by 13% for FY21/FY22E, lower EV/EBITDA for pharma to 6x (from 8x earlier) and reduce EV/EBITDA for the Chemical business to 3x (from 4x earlier) to factor in the subdued outlook in the relatively higher margin RadioPharma/Allergy/Chemical business. Accordingly, we arrive at price target of INR415. At CMP of INR263, JLS is trading at an attractive valuation of 4.6x FY21E EPS of INR57 and 4x FY22E EPS of INR66. Maintain Buy.
Management call highlights
Manufacturing hurdle at API plant/reduced patient flow to impact Radio Pharma business in near term
* Few employees at Nanjangud API plant have tested positive for COVID-19. Accordingly, the plant would be shut at least till 10th Apr’20 with all employees being placed under self-quarantine. While contribution from this plant is ~6-7% of sales, due to availability of inventories, business is not expected to get impacted in the near term.
* Due to the lockdown situation in North America, there has been a decline in patient visits to hospitals and for allergy treatments. As a result, consumption has reduced for products under RadioPharma/Allergy segments.
* While the supply-demand in volume terms for JLS’ products in both pharma as well as LSI remain intact, transportation constraints in India and reduced number of employees at plant level have reduced the utilization level.
* However, with the government recently easing guidelines for transportation in India, the movement of goods (both raw material as well as finished goods) should improve over the near term.
* Further, higher precautions at plant level should provide some comfort to employees, and thus, improve capacity utilizations.
* The solid dosage facility at the Maryland plant has received VAI for the USFDA inspection conducted during 24-28th Feb’20.
* Pertaining to the Life Science Chemical segment (18% of sales), a sharp decrease was witnessed in prices of finished goods due to the decline in crude oil prices. Raw material prices could also decline but with a lag, and thus, profitability of this segment could see near-term pressure.
* This can get offset by improved profitability in Specialty Intermediates and Nutritional products (18% of sales) on lower raw material prices.
* The company has adequate raw material as well as finished goods to mitigate the supply disruption.
* JLS is witnessing stable demand for the DDDS business from international customers. Both Noida and Bangalore offices are currently working but are seeing lower employee turnout. Order flow has been strong. Until the lockdown continues, the segment will be impacted, though it is not expected to be large.
* Foreign currency debt stands at USD400m (long-term) and USD35m (Working Capital)
* Promoter has zero pledge.
* Demerger of JLS’ pharma and LSI business is on the backburner due to delays in approval from the NCLT on account of the lockdown.
* Precautions are being taken for employees at manufacturing sites such as 100% temperature monitoring and fully tracking the movement of those coming from outside. The company has increased the number of buses to ensure social distancing with the buses being sanitized daily. It has also shut its canteen and started a system of packed food.
* Commercial flights are still operating and the impact has been minimal. As long as commercial flights operate, there will be no impact on the supply chain.
* Sartans: Most issues at the Nanjangud plant have been resolved and supply has resumed. JLS has already seen an increase in market share.
Valuation and view:
We reduce our EPS estimate by 13% for FY21/FY22E, lower EV/EBITDA for pharma to 6x (from 8x earlier) and reduce EV/EBITDA for the Chemical business to 3x (from 4x earlier) to factor in the subdued outlook in the relatively higher margin RadioPharma/Allergy/Chemical business. Accordingly, we arrive at price target of INR415. At CMP of INR263, JLS is trading at an attractive valuation of 4.6x FY21E EPS of INR57 and 4x FY22E EPS of INR66. Maintain Buy.
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