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Solid operating performance

JB Chemicals & Pharmaceuticals’ (JBCPL) Q3FY21 performance was strong at the operating level. Revenue growth benefited by deferment of exports sales worth Rs570mn from Q2FY21 to Q3FY21. Consolidated revenue grew 27.9% YoY to Rs5.5bn while EBITDA margin improved 1030/640bps YoY/QoQ to 31.2% led by higher sales, operating leverage and continued cost benefits. Adjusted PAT also grew strong 94.9% Rs1.3bn. We remain positive considering ~45% of total revenues and ~60% of EBITDA contribution is from domestic formulations with strong growth visibility. The management’s focus would be on improving productivity in India business, gradual portfolio expansion and cost optimisation. Upgrade to BUY from Add with a revised target price of Rs1,456/share.

* Strong growth across businesses: India business grew 26.1% YoY driven mainly by chronic portfolio, improvement in MR productivity and increased prescriber coverage. The acute portfolio improved sequentially. 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 13.1% CAGR over FY20- FY23E. Exports revenue grew 30.6% partly aided by extra sales of Rs570mn which was deferred from Q2FY21. The company is focusing on enhancing R&D initiatives to broaden product portfolio which would help in longer term growth.

* Significant margin improvement: Gross margin improved 100bps YoY to 65.9% backed by better productivity and strong India growth. The operating costs remained largely flat or down as cost optimisation initiatives continue. This helped in EBITDA margin improve 1030bps to 31.2% vs estimate of 24.5%. EBITDA margin also benefited by recognition of deferred export sales from Q2FY21 and lower promotional and travelling expenses due to COVID-19. We expect EBITDA margin to settle around 27-28% over FY22-FY23.

* Outlook: We expect 11.7% revenue and 22.3% PAT CAGR over FY20-FY23E led by a healthy 13.1% CAGR in India business and EBITDA margin expansion of 660bps to 27.9%. We estimate free cashflow generation of ~Rs11bn over the next three years, which can be utilised for shareholder rewards and business expansion. RoE and RoCE would remain strong at 20.8% and 20.3% respectively by FY23E and RoIC would improve to 32.3% in FY23E.

* Valuations and risks: We raise our FY21E-FY23E EPS by 10-11% primarily on higher margins led by saving in operating expenses and productivity improvement. We also raise target P/E(x) to 22x from 20x earlier considering increasing India contribution to EBITDA, significant improvement in return ratios (RoIC of 32.3% by FY23E) and focus of new management on accelerating growth. We upgrade the stock to BUY from Add rating with a revised target price of Rs1,456/share based on 22xFY23E EPS (earlier: Rs1,114/share). Key downside risks: Slowdown in India growth, pricing pressure and currency volatility.

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