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Radiopharma on a gradual recovery path

Import alert slows growth prospects in the Generic segment

* JP delivered in line earnings, despite a better than expected revenue in 1QFY22. The COVID-related business led to a strong YoY revenue growth. However, reduced number of lung procedures in the Radiopharma segment, increased price erosion in the Sartans portfolio, and price erosion in the base portfolio in the Generics segment led to lower-than-expected profitability, offsetting benefits of higher revenue.

* We have reduced our FY22E/FY23E EPS estimate by 14% each to factor in: a) delay in potential products on account of the import alert at Roorkee, b) higher competitive pressures in the Generics portfolio, c) gradual recovery in Radiopharma sales, and d) lower operating leverage. We continue to value JP at 8x 12-month forward EV/EBITDA to arrive at our PT of INR830. We remain positive on JP due to its attractive valuation and improving outlook in the Specialty segment. We maintain our Buy rating.

Low base, COVID-19, and Radiopharma drive YoY growth in earnings

* Net sales grew 41% YoY to INR16.3b (est: INR13.6b), led by a 70%/54%/55% growth in CDMO/Generics/Contract Research and Development Services revenue (29%/27%/5% of sales; INR4.7b/INR4.4b/INR880m). Specialty Pharma sales grew 18% YoY to INR6.3b (39% of sales).

* Gross margin contracted by 120bp YoY to 77.9% in 1QFY22 due to the reduced share of Specialty Pharma. EBITDA margin, however, expanded by 750bp YoY to 23% (est: 26%) due to better operating leverage. Employee expense fell 1,070bp YoY as a percentage of sales, partially offset by higher other expense (+210bp YoY as a percentage of sales).

* EBITDA almost doubled to INR3.8b (est: INR3.5b).

* Adjusted PAT grew ~4.5x YoY to INR1.6b (in line) on a lower base of 1QFY21, which was severely impacted by the COVID-19 outbreak.

Highlights from the management commentary

* JP is reorganizing its API business after the demerger from Jubilant Generics (a wholly-owned subsidiary) and vesting the same under JP. It would create service offerings across the value chain from CRO/CDMO for innovative and generic APIs. The management feels synergies between the CRO and CDMO businesses can be realized more effectively in a holding/subsidiary company as compared to a fellow subsidiary structure.

* It is engaging with consultants to resolve the import alert at the Roorkee facility. The key issues related to clinical protocol and validation batches.

* Within the CDMO segment, JP saw business worth INR2b from COVID-related contracts in 1QFY22. It expects to execute INR1b in additional sales over the coming quarters.

* It would be expanding its Spokane capacity by 50% to cater to demand in the Specialty segment, which would be commercialized by CY24-end.

Valuation and view

* We have lowered our FY22E/FY23E EPS estimate by 14% each reflecting delays in ANDA approvals due to regulatory hurdles at Roorkee, increased price erosion in its Generics base portfolio, and ongoing impact on certain procedures within the Radiopharma segment.

* We expect 24% earnings CAGR over FY21-23E (adjusting for the demerged Life Science Ingredient business), led by a 15% sales CAGR in Specialty. Adjusted for COVID-related contracts, we expect the CDMO segment to deliver 7% sales CAGR over FY21-23E. Recovery in the high margin Specialty business will drive a 490bp EBITDA margin expansion over FY21-23E.

* We value JP at 8x 12-months forward EV/EBITDA to arrive at our TP of INR800. We maintain our BUY rating on account of healthy order book in the CDMO business, improving outlook in the Radiopharma segment, and attractive valuation.

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