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Jubilant Life Sciences (JULS.BO)
Alert: Takeaways from India Pharma Conf., Dec. 6-7
Takeaways from Mumbai — Jubilant Life Sciences presented at our India Pharma
Mini-Conference in Mumbai. Below are key takeaways.
Growth outlook optimistic — Jubilant expects c20-30% volume growth in FY12/13
and believes that the worst on pricing is behind (bottomed out & started
improving). EBIDTA margins were impacted due to competition & high cost
inventory - should improve going forward, as the high cost stock has been used
up. With additional capacity coming online, improving outlook for drug discovery
business & launch of Sartans APIs, growth should be strong in the next 2 years.
Substantial capacity set to come online — Capacity enhancements (cRs4.50bn)
for various facilities will come on stream from 4QFY11 & should add to revenues in
FY12 (full upside potential in FY13). The major capacity enhancement is for
sartans & nutrition ingredients (niacinamide). Capex is likely to be at cRs4bn in
FY11 & Rs3.5bn in FY12.
FCCB maturing in May 2011 — FCCBs worth US$200m (including YTM) is due for
conversion in May 2011. The company believes that if conversion does not
happen, it will be able to redeem the bonds as it has already arranged funds for
the same.
Other key takeaways — 1) Drug discovery business is seeing traction now as
consolidation at the global level seems to be over - expects 20% growth in the
coming year; 2) It aims to become a leader in Vitamin B-3 biz in the next 2-3
years; 3) Total debt is at Rs27bn - apart from FCCBs, no other debt is repayable in
the next 3 years; and 4) H1N1 vaccine order which boosted revenues in 2HFY10
will be absent this year.
Jubilant Life Sciences
Valuation
We use sum-of-the-parts to value Jubilant in view of the diversified nature of its
business and earnings streams. We value its businesses using P/E, but different
target multiples are applied given the differences in growth profiles and operating
parameters. We arrive at a one-year target price of Rs462.54 based on Jubilant's
Pharma & Life Sciences (PLSPS) business at 15x Sept 11E EPS. Our target
multiple is at a 5-10% discount to the target multiple used for Piramal Healthcare,
given Jubilant's higher leverage and lower return ratios and liquidity.
Risks
Our risk rating for Jubilant is Medium as against our quants-based High Risk
rating. We believe that the lower rating is warranted given the strong growth in the
pharma business, recovery in the APP business and greater financial discipline
(reducing debt and lower capex). The main downside risks to our target price and
estimates include: (1) Any delay in filing / launch or a litigation loss would affect
the timing and quantum of revenues and profits; (2) Inability to integrate and
exploit the synergies with its acquired subsidiaries could hurt profitability; and (3)
Increases in molasses and / or other input prices.
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