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Jubilant Life Sciences |
Below estimates; Downgrade earnings |
BUY
CMP: Rs313 Target Price: Rs390
n Jubilant’s numbers are below expectations with a) Revenue growth of 6% (est of 11%), b) OPM at 16.1% (est. of 18.5%) & APAT at Rs826mn (est. of Rs1.1bn)
n High cost inventory in Life Sciences, currency fluctuations (-ve impact of 3%) & lower realization in Pyridine (-ve impact of 4.4%) impacted the operating performance of the company
n Expect gradual recovery in 2HFY11; High cost inventory has been exhausted and price hike in PP has been taken
n Cut earning estimates by 27% and 17%; Maintain Buy with a revised price target of Rs390 (Rs455 earlier)
Lower realization and currency fluctuations impacted revenue growth
Despite 29% growth in APP business, Jubilant’s overall revenue growth at 6% was
below our expectations. In PLSPS segment, revenue growth was below expectations.
Despite 11% volume growth in Life Sciences products, value growth was meager 3%
because of lower realization in Proprietary products (negative impact of 4.4%; c 24% of
revenue) and appreciating INR (negative impact of 3%; 62% of revenue comes from
export). Similarly, Life science services business declined by 3% during the quarter
because of postponement of few customer orders and delay in product approvals. In
APP segment, Agri products grew by 99% driven by improved contribution of fertilizer
business. Though the company has already taken the price hike in PP products and the
additional capacity expansion of Niacinamide, Losartan and Pyridine set to add
incremental revenue, we are of the view that recovery in the business will be gradual in
2HFY11E and full recovery is expected only in FY12E. Overall we expect 10% revenue
growth in FY11E.
Operating margin at 16.1% is significantly below our expectation of 18.5%
Operating margins for the quarter at 16.1% was significantly below our expectation of
18.5%, due to lower than expected contribution in PLSPS space. The margins are mainly
impacted because of lower realization in Life Sciences products (due to high cost inventory)
and lower contribution of services business. Going forward, we expect operating margins to
improve on the back of a) price hike in PP products, b) exhaustion of high cost inventory,
and c) revenue contribution from high margin new contracts. The margins in APP segment
improved considerably (12.6% of EBIDTA from -3% in Q2FY10) because of better
realization in fertilizer segment and company is confident to sustain this margin during
FY11E. Overall we expect operating margins for FY11E to be 17.5% which will further
improve to 20% in FY12E.
APAT at Rs826mn is down by 18%
Poor operating performance coupled with below than expected growth in PLSPS segment
has impacted the profitability of the company. APAT at Rs826mn was lower than our
expectation of Rs1089mn. APAT de-growth of 18% was on account of a) 64% increase in
depreciation, b) 35% decline in other income, and c) subdued operating performance.
However, lower interest cost (down 32% YoY) and tax provisions (7% vs. 19% of PBT in
Q2FY10; due to re-organisation of business in foreign subsidiaries) prevented further
decline in APAT.
Jubilant Industry listing should happen in next 1-2 months
Jubilant has received the high court approval for the de-merger of APP business.
Management has indicated that they will complete all the process of de-merger by
November end including the allocation of Jubilant Industry shares (one share of Jubilant
industry for every 20 shares of Jubilant LifeSciences) and will apply to SEBI for listing in the
month of December. We are of the view that, de-merge of its APP business (c11% of FY10
revenue) into a separate entity “Jubilant Industries Ltd“will enable the company to sharpen
its focus on both the entities independently. We believe that de-merger of APP business will
trigger re-rating of Jubilant LifeSciences.
Cut earning estimates downwards by 27/17%
On the back of below than expected performance in 1HFY11, we cut our earning estimates
by 27% and 17% to Rs25.2 and Rs33.4 for FY11E and FY12E respectively. We are building
gradual recovery in 2HFY11E and full recovery in FY12E as the capacity addition in
Pyridine and API, better pricing environment in Proprietary Products and strong order book
in CMO and DDDS will play out favorably for the company.
Lower target price; Maintain Buy
Given the favorable macro environment for CRAMS space, we continue to believe that
companies like Jubilant who have created upfront infrastructure and built strong relations
with leading MNC companies, should benefits from increased outsourcing from India.
Strong volume growth in Life science products segment, improvement in the realization,
new capacity in Pyridine and Niacinamide and new contracts in CMO and exclusive
synthesis segments will drive growth in next 2-3 years. Moreover, company’s strategic
decision to hive-off APP business will further strengthen its focus on core business. Based
on our revised estimates, we cut our target price from Rs455 to Rs390. We continue to hold
our positive stance on the stock and are of the view that stock will get re-rated in line with
other CRAMS companies post de-merger of its APP business. We maintain Buy rating on
the stock.
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