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Steady performance; strong margins to sustain

JB Chemicals & Pharmaceuticals’ (JBCPL) Q4FY21 performance was largely in line with estimates. Consolidated revenue grew 19.1% YoY to Rs5.3bn while EBITDA margin improved 270bps YoY to 23.4% led by higher sales and operating leverage. Adjusted PAT also grew strong by 48.4% to Rs855mn. QoQ drop in margin was mainly due to change in revenue mix with higher exports and normalisation of S,G&A expenses. Management is focused on maintaining FY21 EBITDA margin level as well as profitable growth. We remain positive considering ~45% of total revenues and ~60% of EBITDA contribution is from domestic formulations with strong growth visibility. The management’s strategy is towards improving productivity in India business, portfolio expansion and cost optimisation. Maintain BUY with a revised target price of Rs1,743/share.

Strong growth across businesses:

India business grew 9.4% YoY driven mainly by chronic portfolio, improvement in MR productivity and increased prescriber coverage. The acute portfolio has started improving now and hence, growth momentum should improve hereon. We believe the strong growth would be supported by focus on MR productivity improvement and recovery in the industry growth. We expect India revenue to grow at 13.8% CAGR over FY21-FY23E. Exports revenue grew 31.2% driven by US, South Africa and CMO segments. The company is focusing on enhancing R&D initiatives to broaden product portfolio.

Margins to remain strong:

EBITDA margin improved 270bps YoY to 23.4% backed by better productivity and costs rationalisation. However, gross margin dropped 370bps due to higher exports growth. The focus of the management would be on driving profitable growth which would help in sustain high margin seen in FY21. The cost savings seen in FY21 due to lockdown, has started to normalise and we believe strong growth recovery in India would compensate the cost increase in FY22E. We expect EBITDA margin to remain ~27-28% over FY22-FY23E.

Outlook:

We expect 13.4% revenue and 15.0% PAT CAGR over FY21-FY23E led by a healthy 13.8% CAGR in India business while maintaining EBITDA margin at ~27- 28%. We estimate free cashflow generation of ~Rs7bn over the next two years, which can be utilised for shareholder rewards and business expansion. RoE and RoCE would remain strong at 21.8% and 21.0% respectively in FY23E and RoIC would improve to 33.3% in FY23E.

Valuations and risks:

We raise our FY22E-FY23E EPS by 4-5% primarily on higher revenue growth driven by India and CMO businesses. We also raise target P/E(x) to 25x from 22x earlier considering increasing India contribution to EBITDA, significant improvement in return ratios (RoIC of 33.3% by FY23E) and focus of new management on accelerating growth. Maintain BUY with a revised target price of Rs1,743/share based on 25xFY23E EPS (earlier: Rs1,456/share). Key downside risks: Slowdown in India growth, pricing pressure and currency volatility.

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