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CMO outlook bright; Radiopharma in gradual recovery mode All segments showing strong growth

* Jubilant Life Sciences (JLS) delivered higher-than-expected 3QFY21 earnings, led by better traction in a) the Contract Manufacturing Organization (CMO) / Generics category of the Pharma segment and b) Nutritional products in the Life Science Ingredient (LSI) business.

* Post the demerger of LSI with Jubilant Ingrevia from 1st Feb’21, the segment is classified as ‘discontinued operations’; JLS has been renamed Jubilant Pharmova (JP), which would now comprise the Specialty Pharma, CMO, Generics, Contract Research and Development, and Drug Discovery businesses.

* The strong order book in CMO, led by COVID in the near term, more than offsets the slowdown in the Radiopharma segment. We increase our EBITDA estimates for JP by 25%/11%/5% for FY21/FY22/FY23 and exclude the demerged LSI business. We value JP at 10x 12M forward EV/EBITDA to arrive at Target Price of INR1,120. We remain positive on JP on a strong outlook for the CMO/Generics segment and gradual recovery in the Specialty segment. Maintain Buy.

CMO leads charge in strong quarterly performance

* JLS’ 3QFY21 results pertain to financial performance on a combined basis (Pharma + LSI).

* JLS’s net sales grew 15% YoY to INR26.6b (our est.: INR24.8b).

* In the Pharma segment, CMO revenues grew 66% YoY (24% of sales) and Generics sales grew 57% YoY to INR4.6b (17% of sales), while Specialty Pharma sales continued on the downtrend with 24% YoY decline to INR6b (22% of sales).

* In the LSI segment, Nutritional products grew 27% YoY (6% of sales), the Life Science Chemical business grew 14% YoY (16% of sales), and Specialty Intermediates grew at a moderate rate of 3% YoY (11% of sales).

* The EBITDA margin expanded 260bp YoY to 24.2% (our est.: 19.8%) on higher contribution from the CMO business (which has superior margins). EBITDA grew 27% YoY to INR6.5b (our est.: INR4.9b).

* Adj. PAT grew at a higher rate of 39.6% YoY to INR3.2b (our est.: INR2.2b) on better margins and lower interest cost.

* For 9MFY21, revenue/EBITDA grew 2.5%/1% YoY to INR69b/INR14b, while adj. PAT declined 6% YoY to INR6.3b.

Highlights from management commentary

* Post the final NCLT approval for a demerger, the Life Science Ingredient (LSI) business (Jubilant Ingrevia) would be listed separately from 19th Mar’21.

* JP’s net debt stood at INR20.4b and Jubilant Ingrevia’s net debt was INR5.3b.

* JP delivered strong growth in the Pharma segment, led by opportunities in CMO/Generics. The higher margin CMO business further boosted overall profitability for the segment.

* Of the deals worth INR5b pertaining to COVID in the CMO segment, about 50% has been realized in 3QFY21. JP has started contract manufacturing for Bamlanivimab (approved by the USFDA for COVID treatment) and NVXCoV2373 (COVID vaccine candidate), which could aid in better prospects for the CMO business over the medium term.

Valuation and view

* We expect an 8% EBITDA CAGR over FY20–23, led by a 15%/8%/6% sales CAGR in CMO/Radiopharma/Generics. We expect JP to witness a healthy EBITDA trajectory, with near-term growth dominated by the CMO business and medium- to long-term growth dominated by the Specialty Pharma, Generics, and non-COVID CMO businesses.

* We value the Pharma segment (Jubilant Pharmova) at 12M forward EV/EBITDA of 10x, factoring in increased demand for high-margin CMO opportunities, and arrive at Target Price of INR1,120. We remain positive on JP on a strong outlook for the CMO/Generics segment and gradual recovery in the Specialty segment. Maintain Buy.

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