Jubilant Organosys-Topline grew by 5.7%YoY:: Motilal Oswal

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Jubilant Organosys (JOL IN; Mkt Cap USD1.2b, CMP Rs313, Neutral)

Topline grew by 5.7%YoY to Rs9.88b while Adjusted PAT increased by 42.3%YoY to Rs821m  

Overall, the Pharma and Life Sciences Products and Services (PLSPS) business reported revenue growth of 2.7%YoY to Rs8.5b while Agri & Performance Polymers (APP) business recorded 29%YoY growth to Rs1.38b.

      

We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Over the past few years, Jubilant has made two large acquisitions in North America which has strengthened its presence in the sterile segment but has also resulted in a highly leveraged balance sheet.  

High debt, large FCCB redemption (US$202m in May-2011 including YTM) and low RoCE (8-12%) remain an overhang. the stock is valued at 15.4x FY11E EPS and 12.8x FY12E EPS. Maintain Neutral.

High debt, FCCB redemption remains an overhang
 Jubilant had raised US$310m in FCCBs in 2005/2006 to fund acquisitions and capex.
 Of these, FCCBs worth US$142m (US$202m incl YTM) are due for redemption in
May 2011. We believe that these are unlikely to get converted into equity given the
high conversion price of Rs413 (effective conversion price of Rs589 taking into account
YTM).

Cutting earnings estimates by 21% for FY11 and 15% for FY12
 Based on the lower than expected 2QFY11 performance, we have cut our EBITDA
estimates by 14% for FY11 and 7% for FY12.
 We have cut our EPS estimates for FY11E by 21% and for FY12E by 15.4%.
 We now forecast EPS of Rs20.3 for FY11 (23.4%YoY decline) and Rs24.4 for FY12
(up 20%YoY).

Outlook and Valuation
We believe that the proposed de-merger of the APP business is a positive step as it
reflects management's intention to have a focused approach for the PLSPS business. The
de-merger will also lead to a better RoCE for JOL as the APP business accounted for only
2% of JOL's FY10 EBITDA but 6% of capital employed. We believe Jubilant is well
positioned to exploit the expected increase in outsourcing from India. Customer inventory
de-stocking for CRAMS companies is coming to an end and we expect growth to rebound
in FY11 as customers are likely to commence re-stocking. Over the past few years,
Jubilant has made two large acquisitions in North America which has strengthened its
presence in the sterile segment but has also resulted in a highly leveraged balance sheet.
We also believe that some of the past acquisitions (like Draxis) have been made at
expensive valuations resulting in extended payback periods. High debt, large FCCB
redemption (US$202m in May-2011 including YTM) and low RoCE (8-12%) remain an
overhang. Based on our revised estimates the stock is valued at 15.4x FY11E EPS and
12.8x FY12E EPS. Maintain Neutral.