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Headwinds persist; margin pressure amid generics impasse

About the stock: Jubilant Pharmova is engaged in specialty pharmaceuticals, CDMO, generics, drug discovery and proprietary novel drug businesses.

* In specialty pharmaceuticals, it is the third largest radiopharmaceutical manufacturer with second largest commercial radio pharmacy network in US. It is the second biggest player in the allergenic extract market in the US

* In CDMO (CMO, APIs) Jubilant is engaged in CMO of sterile injectables, ophthalmics, otics and ointments, creams and liquids

* Revenue break up (FY22)- Generics - 19%, Specialty Pharma –43%, CDMO Sterile Injectable – 21% and CRDMO (CDMO-API + Drug Discovery) – 17%

Q1FY23 Results: Traction in specialty pharmaceuticals and CRDMO was offset by muted numbers in CDMO sterile injectables and generics

* Revenues were down 11% YoY to | 1452 crore

* EBITDA was at | 192 crore, down 49% YoY with margins at 13.3%

* Adjusted PAT was at | 47 crore (down 71% YoY)

What should investors do: Jubilant’s share price has de-grown by ~0.8x in the past three years (from ~| 439 in August 2019 to ~| 360 in August 2022) even after considering demerger of life science ingredients business into Jubilant Ingrevia

* Downgraded from HOLD to REDUCE due to 1) negative operating leverage in generics amid regulatory overhang, 2) slower-than-expected ramp-up in Radiopharma, and 3) lack of ex-Covid growth levers in CDMO

Target Price and Valuation: Valued at | 360 i.e. 13x FY24E EPS of | 26.1

Key triggers for future price performance:

* Expansion of capacity for sterile fill & finish at Spokane by 100% and new filler & lyo line at Montreal

* Increase in CDMO order-book visibility amid loss of Covid opportunities

* Ramp up in Ruby fill installations, embarking on executing turnaround plan in radio pharmacies with a target to achieve mid to high single digit EBITDA

* Expansion into non-US markets and resolving regulatory concerns over Roorkee and Nanjangud facility

Alternate Stock Idea: Apart from Jubilant, in CRAMs space we like Divi’s.

* Quintessential play on Indian API/CRAMs segment

* BUY with a target price of | 4655

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