Jubilant Organosys-PAT falls short of estimates: Kotak Sec

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Jubilant Organosys (JOL)
Pharmaceuticals
PAT falls short of estimates due to poor operating margin. Sales came in 5%
lower than our estimate due to lower APP sales; all key segments were in line except
CMO. PAT before exceptional was 35% lower than estimated due to poor EBITDA
margin at 16%, flat qoq versus our estimate of 20%. Historical trends in PLSPS confirm
volatile EBITDA margin trends with a high base of 26% margin in FY2010. 2HFY11E
should be better given (1) APP margin stabilizing at 12% in 1HFY11 (2) increase in RM
cost being passed on in the lifescience ingredients business, (3) growth in high-margin
CMO business on account of likely contracts and (4) addition of capacities in 4QFY11E.
Our FY2012E estimates are unchanged. Maintain Buy with a price target of Rs400.




2QFY11 revenues, up 6% yoy, 5% below estimate, PLSPS sales in line
Sales were 5% lower than our estimate due to lower APP (14% of sales) sales at Rs1.4 bn.
However PLSPS sales were broadly in line with our estimate with three key segments of (1)
lifescience ingredients (55% of sales) in line with our estimate, although up only 2% yoy due to an
adverse exchange rate and lower selling prices. For example, Lifecience chemicals business
witnessed net sales growth of 3% yoy due to (1) adverse exchange rate impact of 3% (2) decline
in prices of 4.4% although (3) volume growth was 10.4% (2) generics (11% of sales) was 3%
higher than our estimate. However, CMO (14% of sales) revenues disappointed with no growth
qoq. With a pick-up in CMO business in 2HFY11E on likely contracts, we believe recovery in
2HFY11E is intact.

EBITDA margin at 16% was lower than our estimate of 20%
EBITDA margin excluding other income was stable qoq at 16%, lower than our estimate of 20%.
Although APP margin was stable at 12% this quarter; PLSPS margin dipped to 19% from 25% last
year due to (1) margin pressure seen in pyridines, on account of the lag effect in passing on higher
input material prices to customers and (2) slow pick up in CMO business due to delays in highmargin
customer orders.

We believe 2HFY11E will witness recovery. We leave our FY2012E estimates unchanged
Historical trends in the PLSPS business confirm volatile EBITDA margins with a high base of 26% in
FY2010 (more inside). 2HFY11E is likely to see a recovery with (1) margin at APP business
stabilizing at 12% as seen in 1HFY11, (2) increase in RM cost being passed on in the lifescience
ingredients business, and (3) growth in high-margin CMO business on account of likely contracts.
We expect the PLSPS margin to return to a 22% margin in 2HFY11E from 19% in 1HFY11.
Interest cost savings, down 32% yoy came through this quarter as JOL has used the funds from a
recent QIP issue (Rs3.8 bn) and cash on hand (Rs7.2 bn including QIP proceeds as of March 2010)
to retire Rs 5 bn of high-cost rupee debt in April 2010.