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INVESTMENT THESIS

J.B. Chemicals & Pharmaceuticals Ltd (JBCP) is one of the fastest growing company in the IPM on the back of its brand and therapy focused strategy. Its strong domestic franchisee (>85% sales from 5 mega brands: Cilacar & Nicardia in Cardiac and Metrogyl & Rantac in Gastro-Intestinal) enjoy enormous brand equity which allows them to earn >35% EBITDA margins.

While unwinding of erst-while promoter’s transactions provide a permanent shift in base, EBITDA margins likely to be supported at the current levels on account to productivity improvements and renewed focus on CMO, US generics and Russia business.

We valued JBCP using SOTP based methodology; valuing Domestic franchisee at 7x FY23E EV/Sales and Exports business at 4x FY23E EV/Sales given their inherent quality. We thus initiate coverage on JBCP with BUY rating and target price of INR 2,000 which is ~33% upside on CMP. At our target price, JBCP is available at 26x FY23E PER; on the CMP JBCP trades at 20x FY23E PER.

JBCP to solidify base in leadership brands; growth to be driven by new areas

* JBCP has consistently outperformed the IPM on the back of its 5 mega brand groups contributing >85% of its domestic sales. JBCP has posted superior growth in these mega brands where it has >50% market share.

* With the new management in place post acquisition by KKR, as per us the growth will be led by higher MR productivity (10-12%), new therapys (Nephro & Pediateric divisions) and increased pace of launches in key chronic therapies.

EBITDA margins likely to sustain; War-chest ready for an inorganic acquisition

* Renewed focus on higher margins segments such as CMO, US generics and Russia business under the new management to be margin accretive, as per us improvements should be visible post H2FY22.

* Beyond productivity gains, there is a permanent shift in EBITDA margin base with unwinding of related party transactions (>200bps).

* JBCP’s positioning in terms of cash balances and current investments (INR 706crs for FY21), superior free cash flow generations (INR 350crs for FY22E) and lower debt levels give it significant war chest to pursue inorganic acquisitions

Superior execution in the domestic segment; deserving of higher multiples

* Dominant legacy brands in the domestic market ensures strong stream of cashflows enabling the high pedigree management to pursue new growth initiatives in CRAMs, US generics and Russia with renewed focus.

* Domestic franchisee (>85% from mega brands) enjoy enormous brand equity which allows them to earn >35% EBITDA margins. We believe it is deserving of much higher multiples, thus valuing at 7x FY23E EV/Sales while export business at 4x FY23E EV/Sales.

* We thus initiate coverage on JBCP with Buy rating and target price of INR 2,000 which is ~33% upside on CMP. At our target price, JBCP is available at 26x FY23E PER; on the CMP JBCP trades at 20x FY23E PER.

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