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Lower growth; richer valuation

Weak Q3F23 results   

JB Chemicals & Pharmaceuticals’ (JBCP IN) Q3FY24 revenue and EBITDA came in 4% and 7% below our estimates, respectively. PAT was 12% lower due to higher depreciation, finance cost and tax rate. Domestic business was as expected, while a 7% decline in the CDMO business and a 1% drop in formulations exports led to the miss.

India business – Growth settling at lower levels

Reported domestic business growth at 13.5% benefited from the recent brand acquisition from Glenmark. Excluding that, growth was 9.5% as per our estimate. This is an improvement from last quarter’s 7% organic growth; we had expected this and built into our projections. We believe that the sustainable organic growth rate for JBCP’s domestic business is 10% +/- 1%. We remain concerned that this slowdown in organic growth is not yet reflected in the stock’s valuation.

Other businesses – Growth trending down

After a robust growth phase that saw the quarterly run rate growing 2.5x in past four years, contract manufacturing seems stabilizing at current level. After the low 4.5% growth YoY in Q2, the business saw a 7% dip YoY in Q3. Management commentary did not allude to a major pick-up there. Export formulations business declined 1% YoY in Q3; management mentioned loss of some institutional business in South Africa. We expect this business to grow ~10% in FY25E.

Margin at an all-time high; limits room for expansion

Current EBITDA margin at ~27% is at the highest level ever and is significantly above the pre-COVID levels of 20-21%. We see limited room for further margin improvement. The recent geopolitical disruptions in global logistics could worsen margins.

Valuation: maintain Reduce with raised TP of INR 1,713

We pare FY24E core EPS by 2% and broadly maintain FY25E-26E core EPS. JBCP trades at 43x FY25E core earnings. We see little value at this valuation. Maintain Reduce with a raised TP of INR 1,713 (from INR1,515), which is 36x FY26E core earnings plus cash per share. Value-accretive M&A would be the key upside risk

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