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CRAMS boost; initiate with Buy
We initiate coverage on Jubilant Life Sciences (erstwhile Jubilant
Organosys) with Buy and target price of `411. We are positive on
the stock owing to expectations of steady growth momentum,
easing financial leverage and value unlocking through demerger
of agri & performance polymer (APP) business.
Pharma life sciences (CRAMS) – Key growth driver. We
expect pharma & life sciences products (PLSP) segment
(contributes 88% of total revenue) to report 11.4% CAGR over
FY10-13e driven by increased capacity utilisation in custom
manufacturing operations (CMO), recent addition of new CRAMS
contracts and +50% capacity addition in life sciences chemicals.
Value unlocking via APP demerger. Demerger of APP
business would result in better margin and return ratios as PLSP
has higher margins (21-22%) and returns than APP. We believe
this would lead to valuation re-rating for the company.
Improving financials. We expect D/E to decline to 0.8x in
FY13e from 2.8x in FY09 on the back of steady growth, recently
concluded QIP and better profitability. Further, margins and
returns would improve post demerger of the APP business.
Valuation and risks. We value Jubilant at `411 based on 10x
FY12e PLSP EBITDA and 4x FY12e APP EBITDA. At CMP,
the stock trades at 11.8x FY11e & 10.8x FY12e earnings. Risks:
Loss of any long-term contract would be major setback.
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