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De-merger to enhance valuations- reiterate LONG
Jubilant’s 1QFY20 sales came below EE owing to sharp decline in Acetic Anhydride prices and decline in API revenues, while EBITDA at Rs. 4.35bn, came 5% below EE. It recorded a one-off of Rs. 480mn during the quarter stemming from forex loss, litigation charges, remediation charges and penalty charges related to the US market, adjusting for it, EBITDA was largely in-line with EE. Jubilant is looking to restructure its business by demerging its Life sciences and Pharmaceutical biz, we believe it is a right step and could help valuations which have been impacted owing to low margin and volatile biz of Life sciences. At current valuations of 8x/7x P/E, we believe the risk-reward is favorable, and thus we reiterate LONG with a Jun’20 TP of Rs 753 (vs Jun’20 TP: Rs 751) at 12x PE (unchanged).
CMO biz — Expanded facilities to aid growth: The CDMO biz was up 24% yoy despite slow-down in API biz (lower sartans production due to additional quality checks on raw materials to meet enhanced regulatory requirements), indicating towards sharp increase in CMO biz. Management stated strong outlook for CMO business and to cater to the strong demand, they are looking to expand capacity by: a) by increasing work shift one more line 7 days week from 5 days week earlier and b) additionally mentioned new Lyo line (expected to commercialize from 2HFY20E).Both will add 30% to its existing capacity, which will translate into US$ 30mn annual additional revenues.
Specialty post robust growth; while generics remains subdued: Specialty biz grew by 9% yoy, while sequentially grew by 4%. Management stated growth was largely on the account of higher volumes in Radio-pharma and Venom biz. On Rubyfill, it mentioned revenues have tripled (yet below US$10mn annual run rate; we believe) yoy on the lower base and they expect it to break-even by FY21E end. Management remains upbeat about its Radiopharma pipeline & has guided to file and launch 7 products over next 2 to 5 years. We believe majority of the launches will be after FY22E as till date no product has been filed and the review period in Radiopharma product is much higher than normal OSD.
Generics revenues at Rs 2.5bn were up 5% yoy. 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.
Risk and Reward Favorable: Following ~40% correction in stock over the last 6 months; we believe, majority of concerns i.e. (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, are baked in valuations with stock trading at 8x/7x P/E on FY20/21E earnings. We re-iterate Long rating on the stock with Jun’20 TP of Rs. 753 at 12x P/E. Demerger of Pharma and Life science biz could very well support valuations, translating into re-rating of Pharma biz.
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