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Buy JB Chemicals and Pharmaceuticals Ltd For Target Rs.2,046

Strong India growth; margins to improve further

JB Chemicals & Pharmaceuticals’ (JBCPL) Q1FY22 performance was better than estimates driven by strong growth in India business. Consolidated revenue grew 16.0% YoY to Rs6.1bn and EBITDA margin dropped 280bps to 27.0% in line with estimate. Adjusted PAT was flat at Rs1.2bn due to high base. YoY drop in margin was mainly due to low cost base in the previous year.

Recent announcement of 50% price increase in Ranitidine would likely start from Q3FY22 and would lift margin up from current levels. 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 Rs2,046/share.

* Strong growth led by India: India business grew 39.7% YoY driven by strong recovery in industry growth, acute portfolio, improvement in MR productivity and increased prescriber coverage. The acute portfolio has started improving now and hence, growth momentum should sustain. 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 18.9% CAGR over FY21-FY23E including price benefit in Ranitidine. Exports revenue declined 1.7% due to covid-19 led disruptions in certain markets. However, US and South Africa grew above 20%. Management is confident of achieving double digit growth in exports in FY22E. The company is focusing on enhancing R&D initiatives to broaden product portfolio.

* Margins to improve further: EBITDA margin stood at 27% as expected. The focus of the management would be on driving profitable growth which would help in sustain high margin seen in FY21. The benefit of price hike in Ranitidine and improvement in MR productivity would help in improving EBITDA margin further. We expect EBITDA margin to improve to 28.9% by FY23E.

* Outlook: We expect 15.3% revenue and 19.8% PAT CAGR over FY21-FY23E led by a healthy 18.9% CAGR in India business and 150bps improvement in EBITDA margin to 28.9%. 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 23.4% and 22.5% respectively in FY23E and RoIC would improve to 35.9% in FY23E.

* Valuations and risks: We raise our FY22E-FY23E EPS by 3-9% primarily on price increase benefit in Ranitidine. We also raise target P/E(x) to 27x from 25x earlier considering increasing India contribution to EBITDA, significant improvement in return ratios (RoIC of 35.9% by FY23E) and focus of new management on accelerating growth. Maintain BUY with a revised target price of Rs2,046/share based on 27xFY23E EPS (earlier: Rs1,743/share). Key downside risks: Slowdown in India growth, pricing pressure and currency volatility.

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