Macquarie Research: Jubilant Organosys (JOL IN, Rs334, Outperform, TP: 430)

Jubilant Organosys
(JOL IN, Rs334, Outperform, TP: 430)
Key takeaways
􀂃 JOL indicated that the primary reason for the miss in 1QFY11 was the margin decline in the Life
Sciences segment, which was due to the lag effect in passing on the input material cost increase;
which should now correct. Prices in the Life Science Chemicals segment have stabilized, and
JOL expects improved margins in 2Q FY11.
􀂃 For the flagship pyridine business JOL expects a revival starting in 3Q FY11. JOL holds a
leadership position in pyridine globally, with ~ 45% market share and of which substantial
contracts are long-term, with cost-plus arrangements protecting margins (albeit with
a lag). JOL’s low cost in the segment is a key competitive edge with its costs 20% lower than the
nearest competitor. Five Pyridine products are in phase 3 of development (the last stage) and
management believes that there might be a product launched by the end of FY11. Commissioning
of niacinamide capacity (key pyridine derivative) in 2H FY11 is expected to further add to the
momentum. Looking to expand its vitamin B plant to become the second largest producer of
Vitamin B in the world. JOL has 15-20% market share in vitamins.
􀂃 Postponement of some orders in the CMO business, which have been due to a delay in the
innovator client's product approval as well as the exchange rate volatility, further added to the
weakness. In 2H FY11 JOL expects a new vaccine contract, for which a large pharma customer
has already approved its facility. This could be a significant driver.
􀂃 Drug discovery services made losses during FY10. Management expects a turnaround in FY11. In
API business, JOL has amongst the best margins in the industry (25-27% EBITDA margin).
􀂃 Management Listing of the Agri and Performance Polymer business by the end of CY10 – Agri
and Performance Polymer business accounts for 11% of sales, ~2% of EBITDA and 4% of capital
invested.
􀂃 JOL highlighted that it had an order book of US$1bn, providing visibility for growth (US$245m
worth of orders for the remainder of FY11, over US$200m orders for FY12 and FY13, and over
US$175m orders for FY14 and FY15).
Our view
􀂃 JOL is an excellent pick in the Indian Pharma space due to the ramp-up of its high-margin life
sciences business ; a receding debt overhang; credible management; and a valuation discount to
domestic peers despite a 24% EPS CAGR for FY10–13E. JOL is currently trading at 12 x FY11E
earnings. Given the high leverage, we value JOL based on an EV/EBITDA methodology at 9x
FY12E EBITDA (25% discount to its historical average). Despite near-term margin pressure,
we continue to believe that JOL is among the best proxies to participate in the global pharma
outsourcing opportunity.