Jubilant Organosys Muted Quarter - 2H FY11 key::Macquarie

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Jubilant Organosys
Muted Quarter - 2H FY11 key
Event
 JOL reported 2Q FY11 results with net sales of Rs9.9b (up 6% YoY, Macq
estimate Rs10.7b). EBITDA was Rs1.6b (vs. our estimate of Rs1.9bn). Adj.
PAT came in at Rs820m (up 42% YoY), partially helped by a lower tax rate.


 The primary reason for the miss was the margin decline in the Life
Sciences segment (PLSPS segment margin at 19.4% in 2QFY11 vs.
24.8% in 2QFY10) due to exchange rate volatility, pricing pressures in the
pyridine business and higher input cost. JOL indicated pricing pressure is
now easing and they have exhausted high cost input inventory, which
would result in improved top line and margins for 2HFY11. JOL highlighted
that it had an order book of US$1b, providing visibility for growth (> US$200m
orders for FY12 and FY13, and > US$175m orders for FY14 and FY15). We
maintain our OP rating with a revised target price of Rs390.

Impact
 Life sciences products: volume growth of ~13% despite revenue growth of
5% yoy. JOL indicated they have recently taken a price increase at the
flagship Pyridine franchise and high cost input inventory is now exhausted.
 Commissioning of niacinamide capacity (key pyridine derivative) in
4QFY11 is expected to be a key growth driver.
 Also supply of key API’s (Sartan’s and Donepazil) will help drive growth.
 Ramp-up of Sestamibi (key Product) is now expected starting 2HFY11
as the shortage of nuclear isotopes (raw material) was addressed.
 Life sciences services revenue was down 3% yoy. In custom manufacturing
while visibility continues to improve, volatility persists due to slow regulatory
approval of customers’ product. Also the research services (DDDS) business
de-grew 18% yoy due to uncertainty in the US CRO market.

Earnings and target price revision
 Given the subdued 1HFY11, caution warrants us to adjust to our estimates.
Our revised FY11/12/13E EBITDA estimates are Rs7.5b /9.5b /11b down from
Rs8.9b /10.6b /12.4b, and earnings are Rs24/32/40 down from Rs29/37/46,
respectively. Our revised TP at 9x FY12E EBITDA is Rs390 (earlier Rs430).

Price catalyst
 12-month price target: Rs390.00 based on an EV/EBITDA methodology.
 Catalyst: PLSPS margin improvement in 2HFY11

Action and recommendation
 JOL is currently trading at 9.6x FY12E earnings. Given the high leverage, we
value JOL based on an EV/EBITDA methodology at 9x FY12E EBITDA (25%
discount to its historical average). While we think pressure exists on the stock
near term, we continue to believe that JOL is among the best proxies to
participate in the global pharma outsourcing opportunity. Maintain Outperform.