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Our Take:

Jubilant Ingrevia has presence across mainly three segments Speciality Chemicals (33% of revenue), Nutrition and Health Solutions (18%) and Life Science Chemicals (49%), with strong backward integration and a leading market position. About 25% of Life Science Chemicals (LSC) volumes and 45% of pyridine and picolines (speciality chemicals) are consumed in house, leading to retaining of higher profit across the value chain. During FY21, the company derived about 54% of its revenue through exports and deemed exports.

Company has a diversified customer base with the top 10 customers accounting 20-25% of total revenue. Jubilant has 60+ products in pipeline across its business segment. It includes 32 in Speciality Chemicals, 24 in Nutrition & Health Solutions and 7 in Life Science Chemicals. Company is the largest producer of Niacinamide. It has 19% global market share in Vitamin B3 and 60% domestic share in Vitamin B4 market. In Speciality chemicals, the company serves 15 of top-20 global pharma and 7 of top-10 global agrochemical companies.

It is a ‘Partner of Choice’ in CDMO services with a strong pipeline catering to 420 clients globally and has a strong track record of building diversified scale and capacities across niche categories. The company enjoys a strong moat of being a lowest cost producer of Pyridine –Beta & all value added products globally. Jubilant has five manufacturing facilities across India and a diversified end-consumer base (pharma: 35%, Nutrition: 21%, Agro: 18%, Industrial: 23%). Company manufactures over 100 products and sells to 1,400 customers globally.

Speciality Chemicals and Life Science Chemicals business tend to induce volatility in operating margin, given the cost-plus structure, however, the company is looking to invest in niche segments like Diketene products, which would lower volatility and improve margin in the segment. Currently, in India Diketene derivatives are imported however post the commissioning of the facility (i.e. from Q4FY22), the import dependence would reduce.

Company has a strong research and development pipeline of over 60 molecules, which would ensure launch of new molecules over the next three-to-four years, aiding revenue growth. Jubilant has planned a capex outlay of around Rs 900cr over the next three years and out of that Rs 360cr to be spent in FY22. Company guides to double its revenue by FY26 led by scale up in the existing products and new products launches across its products segments.

Valuation & Recommendation:

Specialty Chemicals has high entry barriers on account of extensive R&D focus and long gestation period before getting approvals from customers. Life Science Chemicals business witnessed strong margin expansion over the past two quarters, which is expected to moderate in H2FY22. We estimate 14.5% CAGR in revenue led by double digit growth across all verticals. We project EBITDA/PAT CAGR of 20.5%/28% over FY21-23E led by strong margin and lower finance cost. Management has guided for strong growth in FY22 along with margin improvement.

The low leverage, despite capex, would be driven by a healthy EBITDA generation and cash flow from operations as benefits of capex incurred in the past begin to show from Q4FY22. The fluctuations in the margin would remain depending on the prices of key inputs and outputs given the cost-plus structure, particularly in the LSI segment. We are positive on the company on the back of strong demand environment, healthy market share, strong capex programme in the medium term and new additions of products, healthy B/S, and China+1 policy adopted by the companies worldwide.

Jubilant will benefit from robust growth in specialty chemicals business and its focused initiatives to diversify from their animal feed (nutrition) business and move towards higher value added areas i.e. pharma and cosmetic-grade vitamins. As the proportion of sales of speciality products rises over the next two years, the stock could get rerated further. We feel investors can buy the stock at LTP and add more on dips to Rs 650 for base case target of Rs 795 (24.5x FY23E EPS) and bull case target of Rs 844 (26x FY23E EPS) over the next two quarters.

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