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Jubilant Life Sciences (JULS.BO): Incorporate demerger; value pick
Source of opportunity
We reiterate our Buy rating on Jubilant Life with a revised 12-month
target price of Rs 248, implying 22% potential upside. We incorporate
the demerger of the agri and industrial polymers (APP) business and
recent quarterly trends and revise our revenue and earnings estimates
down by 17%-18% and 29%-39%, respectively over FY11E-FY13E. We
forecast revenue CAGR of 13% for Jubilant over FY11E-FY13E on the
back of the anticipated revival in the CRAMS (Contract Research and
Manufacturing Services) industry and capacity expansion in the core
areas of pyridines and injectables. We maintain our Buy rating as
Jubilant as the largest CRAMS company in India, offers exposure, at
historically low valuation, to the secular growth of increased outsourcing
of pharma R&D and manufacturing.
Catalysts
APP demerger enables greater focus of Life sciences: We believe
that the demerger of the APP business is a strategic positive for
Jubilant as it allows management to focus fully on the fast growing
and higher margin Life Sciences segment. APP revenues were 11%
of total sales in FY10 while at the EBITDA level, its contribution was
only 2%, highlighting the low margin nature of the business.
FCCBs redemption (US$ 200mn) in May could ease overhang on
balance sheet: Management has stated in a recent conference call
that they have the funds to repay the FCCB loans. This could ease
some of the concerns on Jubilant’s repayment ability.
Margins to increase by 200 bps: We believe that Jubilant’s
investment cycle is nearing completion with significant
manufacturing capacity having been added over the last few years.
While margins are likely to be negatively impacted in FY11E due to
the demerger, we expect them to bounce back and register a 200 bp
expansion resulting in 27% earnings CAGR over FY11E-FY13E.
Valuation discount at all time high
We reduce our 12-month Director’s Cut based TP to Rs248 (from Rs
408) to reflect the demerger and new estimates.
The stock currently trades at 7.6X on FY2012E EPS of Rs26.86. It is
trading at a 58% discount to its 5-year historical average and at an
all time high 52% discount to the Indian pharma sector.
Our TP implies a P/E of 9.2X, a 41% discount to the India pharma
sector at 15.5X. We believe that this valuation gap will shrink as
more clarity emerges on FCCB repayments and CRAMS growth.
Key risks
Failure to redeem FCCBs, delays in capacity expansion.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy list
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Life Sciences (JULS.BO): Incorporate demerger; value pick
Source of opportunity
We reiterate our Buy rating on Jubilant Life with a revised 12-month
target price of Rs 248, implying 22% potential upside. We incorporate
the demerger of the agri and industrial polymers (APP) business and
recent quarterly trends and revise our revenue and earnings estimates
down by 17%-18% and 29%-39%, respectively over FY11E-FY13E. We
forecast revenue CAGR of 13% for Jubilant over FY11E-FY13E on the
back of the anticipated revival in the CRAMS (Contract Research and
Manufacturing Services) industry and capacity expansion in the core
areas of pyridines and injectables. We maintain our Buy rating as
Jubilant as the largest CRAMS company in India, offers exposure, at
historically low valuation, to the secular growth of increased outsourcing
of pharma R&D and manufacturing.
Catalysts
APP demerger enables greater focus of Life sciences: We believe
that the demerger of the APP business is a strategic positive for
Jubilant as it allows management to focus fully on the fast growing
and higher margin Life Sciences segment. APP revenues were 11%
of total sales in FY10 while at the EBITDA level, its contribution was
only 2%, highlighting the low margin nature of the business.
FCCBs redemption (US$ 200mn) in May could ease overhang on
balance sheet: Management has stated in a recent conference call
that they have the funds to repay the FCCB loans. This could ease
some of the concerns on Jubilant’s repayment ability.
Margins to increase by 200 bps: We believe that Jubilant’s
investment cycle is nearing completion with significant
manufacturing capacity having been added over the last few years.
While margins are likely to be negatively impacted in FY11E due to
the demerger, we expect them to bounce back and register a 200 bp
expansion resulting in 27% earnings CAGR over FY11E-FY13E.
Valuation discount at all time high
We reduce our 12-month Director’s Cut based TP to Rs248 (from Rs
408) to reflect the demerger and new estimates.
The stock currently trades at 7.6X on FY2012E EPS of Rs26.86. It is
trading at a 58% discount to its 5-year historical average and at an
all time high 52% discount to the Indian pharma sector.
Our TP implies a P/E of 9.2X, a 41% discount to the India pharma
sector at 15.5X. We believe that this valuation gap will shrink as
more clarity emerges on FCCB repayments and CRAMS growth.
Key risks
Failure to redeem FCCBs, delays in capacity expansion.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy list
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