Macquarie Research: buy Jubilant Organosys Target Rs 430

Jubilant Organosys
Reasons for jubilation abound
Company profile
 Jubilant Organosys (JOL), with its leadership position in custom research and
manufacturing services (CRAMS), has emerged as a key outsourcing partner
of choice across the pharma value chain from research services to contract
manufacturing. JOL is also a global leader in pyridine and its derivatives. JOL
reported sales of Rs38bn in FY10 with Pharma and Life Sciences Products &
Services (PLSPS) contributing 89%.
Business fundamentals
 Leveraging secular trend in pharmaceutical outsourcing: We believe
Jubilant is one of the best proxies to play the global pharma outsourcing
opportunity which continues to gain traction due to the challenges faced by
big pharma MNCs in depleting research pipelines and upcoming patent
expiries. We believe JOL is an exciting story in the Indian pharma space, due
to the ramp-up of its high-margin life sciences business.
 CRAMS and speciality pharma key driver: CRAMS (57% of the top line)
and specialty pharma are the key drivers for JOL. It is the largest and lowestcost
manufacturer of pyridine in the world, which contributes over 50% of the
CRAMS revenue. Upstream/downstream integration in pyridine provides a
strong entry barrier for competition along with pricing power. JOL’s custom
manufacturing operations (CMO) have a strong edge in the niche sterile
injectables space. With capacity utilization at just 60%, operating leverage
should help drive margins as new contracts are signed and existing ones
ramp up. JOL already services six of the world’s top ten pharma MNCs.
 Debt overhang receding: Visibility is emerging on financial discipline at JOL
through working capital rationalisation and efforts to rein-in capex. Recent QIP
(US$85m) proceeds were used to pay down debt of around Rs4bn which has
a high average interest rate of 10%. It also helps to ease debt repayment
concerns, if any, in FY12 when the second tranche of foreign currency
convertible bonds (FCCB), worth US$200m, are due.
Key triggers
 Signing of additional CRAMs contracts.
Valuation and recommendation
 JOL is currently trading at 9.3x FY12E earnings and 7.7x FY12E EV/EBITDA.
Given the high leverage, we value JOL based on an EV/EBITDA methodology
at 9x FY12E EBITDA (30% discount to its historical average). We maintain
our Outperform rating and target price of Rs430.