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Jubilant Lifesciences Ltd.
Disappointing results – weak margin!
Event
JOL reported 3Q FY11 results below our estimate with net sales of Rs8.7b
(down 10% YoY). EBITDA was Rs1.34b (vs. our estimate of Rs1.64b). The
primary reason for the miss was reduced margins due to unabsorbed
fixed costs in the services business (delay of orders in CMO and weak
DDDS business). JOL reported an EBITDA margin of 15.4% this quarter
vs YTDFY11 margin of 16.9%. PAT came in at Rs440m (down 56% YoY).
The stock is likely to remain under pressure till visibility improves on the
margin recovery in the Life science services business. We maintain our OP
rating with a revised TP of Rs270, even after a large earnings cut, as the
stock has already corrected sharply in the last 3 months (down ~ 35%).
Impact
Life sciences services business sales were at Rs1.67b (down 32% YoY) in
3QFY11. For YTD FY11 the segment is down 13%YoY. The margin was
negative 1.9% in this segment for the quarter driven by unabsorbed fixed
costs due to postponement of customer orders, delayed milestone payments
and under utilisation of capacity. The drug discovery and development
service (DDDS) business contributed 8% and the CMO business contributed
20% to the top-line respectively this quarter. High operating leverage exists in
this segment and we believe a turnaround in FY12 will be critical for the
overall margins of JOL to recover. Any incremental outsourcing deals will
have a larger positive impact on the margins.
Life sciences products business sales were at Rs7b (up 13% YoY) in
3QFY11. In the products business, a sequential improvement in pricing was
there, but compared to 3QFY10, a price reduction (of 2%) and exchange rate
impact (of 2.3%) led to reduced margins. We believe commissioning of
niacinamide capacity (key pyridine derivative), the supply of key APIs
(Sartans and Donepezil) and a ramp-up of Sestamibi (raw material was in
short supply and is now addressed) will be a key growth driver in FY12.
Earnings and target price revision
Given the subdued margins, caution warrants us to adjust our estimates. Our
revised FY11/12/13E EBITDA estimates are Rs5.7b /6.9b /8.2b down from
Rs6.7bn /8.5bn /10bn, and PAT are Rs2.5b/2.9b/4.0b down from
Rs3.3b/4.6b/5.9b respectively. Our revised TP is Rs270 (earlier Rs370).
Price catalyst
12-month price target: Rs270.00 based on an EV/EBITDA methodology.
Catalyst: Margin recovery in the life sciences services business – likely FY12
Action and recommendation
JOL is currently trading at 11x FY12E earnings. Given the high leverage, we value
JOL based on an EV/EBITDA methodology at 10x FY12E EBITDA (at a 15%
discount to its historical avg).We believe pressure will exist on the stock near term
till a margin recovery is visible. We maintain our OP with a revised TP of Rs 270.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Lifesciences Ltd.
Disappointing results – weak margin!
Event
JOL reported 3Q FY11 results below our estimate with net sales of Rs8.7b
(down 10% YoY). EBITDA was Rs1.34b (vs. our estimate of Rs1.64b). The
primary reason for the miss was reduced margins due to unabsorbed
fixed costs in the services business (delay of orders in CMO and weak
DDDS business). JOL reported an EBITDA margin of 15.4% this quarter
vs YTDFY11 margin of 16.9%. PAT came in at Rs440m (down 56% YoY).
The stock is likely to remain under pressure till visibility improves on the
margin recovery in the Life science services business. We maintain our OP
rating with a revised TP of Rs270, even after a large earnings cut, as the
stock has already corrected sharply in the last 3 months (down ~ 35%).
Impact
Life sciences services business sales were at Rs1.67b (down 32% YoY) in
3QFY11. For YTD FY11 the segment is down 13%YoY. The margin was
negative 1.9% in this segment for the quarter driven by unabsorbed fixed
costs due to postponement of customer orders, delayed milestone payments
and under utilisation of capacity. The drug discovery and development
service (DDDS) business contributed 8% and the CMO business contributed
20% to the top-line respectively this quarter. High operating leverage exists in
this segment and we believe a turnaround in FY12 will be critical for the
overall margins of JOL to recover. Any incremental outsourcing deals will
have a larger positive impact on the margins.
Life sciences products business sales were at Rs7b (up 13% YoY) in
3QFY11. In the products business, a sequential improvement in pricing was
there, but compared to 3QFY10, a price reduction (of 2%) and exchange rate
impact (of 2.3%) led to reduced margins. We believe commissioning of
niacinamide capacity (key pyridine derivative), the supply of key APIs
(Sartans and Donepezil) and a ramp-up of Sestamibi (raw material was in
short supply and is now addressed) will be a key growth driver in FY12.
Earnings and target price revision
Given the subdued margins, caution warrants us to adjust our estimates. Our
revised FY11/12/13E EBITDA estimates are Rs5.7b /6.9b /8.2b down from
Rs6.7bn /8.5bn /10bn, and PAT are Rs2.5b/2.9b/4.0b down from
Rs3.3b/4.6b/5.9b respectively. Our revised TP is Rs270 (earlier Rs370).
Price catalyst
12-month price target: Rs270.00 based on an EV/EBITDA methodology.
Catalyst: Margin recovery in the life sciences services business – likely FY12
Action and recommendation
JOL is currently trading at 11x FY12E earnings. Given the high leverage, we value
JOL based on an EV/EBITDA methodology at 10x FY12E EBITDA (at a 15%
discount to its historical avg).We believe pressure will exist on the stock near term
till a margin recovery is visible. We maintain our OP with a revised TP of Rs 270.
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