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Jubilant Life Sciences
3Q: yet another disappointment
Jubilant reported weak 3Q interims but is optimistic about a growth rebound in
FY12 on capex benefits flowing in and recovery in the service business. We cut
earnings estimates by c22% and TP by 35% but maintain our Buy on potential
near-term growth catalysts and attractive valuations, on our numbers.
3QFY11: another disappointing quarter
Jubilant has disappointed, posting weak 3Q interims. Revenues excluding the demerged
APP business were flat yoy while core earnings declined 65% yoy. Management attributed
the weak show to pricing pressures in its Products business, a stronger base effect due to
H1N1 vaccine supply in 2HFY10 and delays/weakness in customer orders. Jubilant’s Service
business (22% of 9MFY11 revenues) saw EBITDA turn negative during the quarter, as
compared to EBITDA margin of 23.1% in 3QFY10. The only key positive takeaway from the
results was the 17% volume growth in its Products business (78% of 9M11 revenues).
While management optimistic about a rebound in FY12; we expect gradual recovery
While management admitted that it was disappointed with the quarterly performance and has
cautioned that 4QFY11 could also disappoint on a yoy basis, it remains optimistic about
growth rebounding in FY12 due to potential near-term growth catalysts - benefits flowing in
from capex (Pyridines, Niacinamide/vitamins and Acetyls); demand uptick in API (sartans,
donepezil hydrochloride, lansoprazole, etc); and operating leverage gains in its Life Science
service business. We have built in EBITDA margin improvement of 110bp in FY12F (over
FY11F) to 17.3% as against 20.9% in FY10 (which also included its now de-merged low
margin (4.5%) APP business).
We lower our EBITDA margin assumptions and cut forecasts/TP but maintain Buy
We make negligible changes to our revenue forecasts but trim our EBITDA margin
assumption by 175-200bp, which results in a 23% cut to our FY11F and 21% cut to our
FY12/13F earnings. We now value the company on a blended FY12F EV/EBITDA of 9.9x
(10.8x earlier) and include YTM of US$60m on its May 2011 foreign currency convertible
bonds, which results in a 35% cut in our TP to Rs230. We maintain Buy on near-term growth
catalysts and attractive valuations.
3QFY11 – another disappointing quarter
Jubilant reported another disappointing quarter primarily due to weakness in Life Science
service business. Management remains optimistic on growth rebounding in FY12 due to
capex and operating leverage benefits.
3QFY11: weak interims…
Jubilant Lifesciences has disappointed yet again, posting weak 3Q interims. Revenues at
Rs8.7bn were 10% lower yoy (flat yoy excluding the demerged Agro & Performance Polymer
(APP) business). EBITDA margin contracted 845bp yoy and 73bp qoq to 15% due to inability to
fully pass on increase in input costs to its customers. While the results are not strictly comparable
yoy due to de-merged APP division, core PAT at Rs464m is lower 65% yoy and 44% qoq
… primarily due to weak Life Science Services business
Good volume growth in Products business but pricing pressure being faced
Jubilant’s Life Science Products business (78% of 9MFY11 revenues) witnessed good volume
growth of 17% which translated into value growth of only 13% due to pricing pressures. Life
Science Ingredients division (API, Proprietary products & Nutrition ingredients) witnessed 15%
volume growth and 11% value growth.
The Generics business was one of the key positive surprises during the quarter with strong
volume growth of 30% and value growth of 24%. This business was aided by 31% growth in the
Radiopharma business as stability has been restored in the Isotope supplies from the Canadian
Nuclear reactor.
Life Science Service business drags overall performance of the company
Jubilant’s Life Science Service business (22% of 9MFY11 revenues) has been one of the key
reasons for earnings disappointment.
The CMO services division witnessed 34% revenue decline during the quarter. Management
attributed the decline to the presence of H1N1 vaccine contract during 2HFY10. It states that
excluding the revenue contribution of Rs550m during 3QFY10, revenue growth was flat. It also
attributed the weakness to delays in customer product approvals (due to regulatory issues) and
reduction in demand orders from key customers due to slowdown faced in their products.
The Drug Discovery and Development Service (DDDS) business continues to be adversely
affected. Management states that while its other units of DDDS division are performing
satisfactorily, its Clinsys division in US has faced pressure on account of market slow down and
pharma consolidation. As well, there has been a postponement of milestone payment to 4QFY11
and 1QFY12.
Margin pressure faced by both Products and Services division
We observe that there is intense margin pressure being faced by both the product and the service
division. We highlight that while the EBITDA margin for Life Science products contracted 730bp
yoy during the quarter, Life Science Services turned EBITDA negative compared to EBITDA
margin of 23% in 3QFY10.
Management has attributed the EBITDA margin contraction in the Products division to a mix of
price reduction and adverse exchange rate measures. On the other hand, the Services business
has been impacted primarily due to under utilisation of capacity due to postponement of customer
orders.
We expect EBITDA to see sequential growth and a stronger FY12
Sequential growth from 4QFY11 though yoy growth could disappoint: Management
expects to see good sequential growth from 4QFY11 onwards. However, it has cautioned that
the forthcoming quarter is likely to be weak yoy due to the strong H1N1 supply in the
comparable quarter last year.
Capex benefits in the Products division: The company also expects near term capacity
expansion benefits in Pyridines (c20% increase), Niacinamide/vitamins (c100% increase) and
in Acetyls (c50% increase). We also foresee strong demand uptick in API (sartans, donepezil
hydrochloride etc) and dosage business.
Margin expansion in Service division to higher utilisation: Management believes that the
slowdown on account of consolidation in the global pharma space has almost fully played out
and it expects both revenue growth (traction in clinical trials, receipt of delayed milestone
payments) and margin expansion (increase in utilisation).
Strong order book in the CRAMs business: Management has stated that its CRAM’s
(Contract research and manufacturing) order book continues to remain strong at about
US$1.1bn
We reduce our EBITDA margin assumptions
We highlight that the company has reported EBITDA margin of 15% in 3QFY11 which is
significantly lower than FY10 EBITDA margin of 20.9% and our FY11-13 forecasts of 18-19%.
Therefore while we make negligible change to our revenue forecasts, we trim our EBITDA margin
assumption by 175-200bp. We also factor in higher interest costs and lower other income which
results in a 21-23% earnings cut to our FY11-13 earnings forecasts.
We cut TP but retain our Buy rating on attractive valuation
Global peers are on an average FY12F EV/EBITDA of 11.3x
We value JOL based on a sum-of-the-parts (SOTP) methodology using FY12F EV/EBITDA
multiples for its various business segments based on domestic/global peer valuations (Table 5).
JOL’s business spans various segments that command different valuation multiples based on
their profitability and future growth prospects.
Higher discount for CMO & DDDS businesses due to weak performance
We now value Jubilant’s CMO and DDDS business at 5% and 15% discount respectively to the
average of its domestic and global peers compared to our ‘at par’ valuation earlier due to their
weak performance. We continue to value its generics business at a 10% premium (due to
presence of high margin specialty pharmaceuticals and better growth prospects) and Life science
ingredients business at 10% discount due to pricing pressures. Consequently, we now value the
company on a blended FY12 EV/EBITDA of 9.9x compared to 10.8x earlier.
We cut our TP by 35% to ; maintain Buy
We factor in the increase in debt and also consider the potential impact of YTM of US$60m on its
US$142m FCCB due in May 2011. Net-net, we cut our TP by 35% to Rs230. Potential recovery in
global outsourcing business (affected by consolidation of Big Pharma and slow regulatory drug
approvals) augurs well for Jubilant – the largest CRAMs player in India. We retain our Buy rating
on potential near-term growth catalysts and attractive valuations, on our analysis.
Risks to our Buy rating
Volatility in commodity prices as JOL consumes and also supplies commodity products.
Slowdown in the global contract manufacturing industry .
Inability to refinance its FCCBs due in May 2011 due to tight financial markets.
Working capital cycle could deteriorate due to re-emergence of liquidity crisis.
Foreign exchange risks
Regulatory risks relating to manufacturing and product quality
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jubilant Life Sciences
3Q: yet another disappointment
Jubilant reported weak 3Q interims but is optimistic about a growth rebound in
FY12 on capex benefits flowing in and recovery in the service business. We cut
earnings estimates by c22% and TP by 35% but maintain our Buy on potential
near-term growth catalysts and attractive valuations, on our numbers.
3QFY11: another disappointing quarter
Jubilant has disappointed, posting weak 3Q interims. Revenues excluding the demerged
APP business were flat yoy while core earnings declined 65% yoy. Management attributed
the weak show to pricing pressures in its Products business, a stronger base effect due to
H1N1 vaccine supply in 2HFY10 and delays/weakness in customer orders. Jubilant’s Service
business (22% of 9MFY11 revenues) saw EBITDA turn negative during the quarter, as
compared to EBITDA margin of 23.1% in 3QFY10. The only key positive takeaway from the
results was the 17% volume growth in its Products business (78% of 9M11 revenues).
While management optimistic about a rebound in FY12; we expect gradual recovery
While management admitted that it was disappointed with the quarterly performance and has
cautioned that 4QFY11 could also disappoint on a yoy basis, it remains optimistic about
growth rebounding in FY12 due to potential near-term growth catalysts - benefits flowing in
from capex (Pyridines, Niacinamide/vitamins and Acetyls); demand uptick in API (sartans,
donepezil hydrochloride, lansoprazole, etc); and operating leverage gains in its Life Science
service business. We have built in EBITDA margin improvement of 110bp in FY12F (over
FY11F) to 17.3% as against 20.9% in FY10 (which also included its now de-merged low
margin (4.5%) APP business).
We lower our EBITDA margin assumptions and cut forecasts/TP but maintain Buy
We make negligible changes to our revenue forecasts but trim our EBITDA margin
assumption by 175-200bp, which results in a 23% cut to our FY11F and 21% cut to our
FY12/13F earnings. We now value the company on a blended FY12F EV/EBITDA of 9.9x
(10.8x earlier) and include YTM of US$60m on its May 2011 foreign currency convertible
bonds, which results in a 35% cut in our TP to Rs230. We maintain Buy on near-term growth
catalysts and attractive valuations.
3QFY11 – another disappointing quarter
Jubilant reported another disappointing quarter primarily due to weakness in Life Science
service business. Management remains optimistic on growth rebounding in FY12 due to
capex and operating leverage benefits.
3QFY11: weak interims…
Jubilant Lifesciences has disappointed yet again, posting weak 3Q interims. Revenues at
Rs8.7bn were 10% lower yoy (flat yoy excluding the demerged Agro & Performance Polymer
(APP) business). EBITDA margin contracted 845bp yoy and 73bp qoq to 15% due to inability to
fully pass on increase in input costs to its customers. While the results are not strictly comparable
yoy due to de-merged APP division, core PAT at Rs464m is lower 65% yoy and 44% qoq
… primarily due to weak Life Science Services business
Good volume growth in Products business but pricing pressure being faced
Jubilant’s Life Science Products business (78% of 9MFY11 revenues) witnessed good volume
growth of 17% which translated into value growth of only 13% due to pricing pressures. Life
Science Ingredients division (API, Proprietary products & Nutrition ingredients) witnessed 15%
volume growth and 11% value growth.
The Generics business was one of the key positive surprises during the quarter with strong
volume growth of 30% and value growth of 24%. This business was aided by 31% growth in the
Radiopharma business as stability has been restored in the Isotope supplies from the Canadian
Nuclear reactor.
Life Science Service business drags overall performance of the company
Jubilant’s Life Science Service business (22% of 9MFY11 revenues) has been one of the key
reasons for earnings disappointment.
The CMO services division witnessed 34% revenue decline during the quarter. Management
attributed the decline to the presence of H1N1 vaccine contract during 2HFY10. It states that
excluding the revenue contribution of Rs550m during 3QFY10, revenue growth was flat. It also
attributed the weakness to delays in customer product approvals (due to regulatory issues) and
reduction in demand orders from key customers due to slowdown faced in their products.
The Drug Discovery and Development Service (DDDS) business continues to be adversely
affected. Management states that while its other units of DDDS division are performing
satisfactorily, its Clinsys division in US has faced pressure on account of market slow down and
pharma consolidation. As well, there has been a postponement of milestone payment to 4QFY11
and 1QFY12.
Margin pressure faced by both Products and Services division
We observe that there is intense margin pressure being faced by both the product and the service
division. We highlight that while the EBITDA margin for Life Science products contracted 730bp
yoy during the quarter, Life Science Services turned EBITDA negative compared to EBITDA
margin of 23% in 3QFY10.
Management has attributed the EBITDA margin contraction in the Products division to a mix of
price reduction and adverse exchange rate measures. On the other hand, the Services business
has been impacted primarily due to under utilisation of capacity due to postponement of customer
orders.
We expect EBITDA to see sequential growth and a stronger FY12
Sequential growth from 4QFY11 though yoy growth could disappoint: Management
expects to see good sequential growth from 4QFY11 onwards. However, it has cautioned that
the forthcoming quarter is likely to be weak yoy due to the strong H1N1 supply in the
comparable quarter last year.
Capex benefits in the Products division: The company also expects near term capacity
expansion benefits in Pyridines (c20% increase), Niacinamide/vitamins (c100% increase) and
in Acetyls (c50% increase). We also foresee strong demand uptick in API (sartans, donepezil
hydrochloride etc) and dosage business.
Margin expansion in Service division to higher utilisation: Management believes that the
slowdown on account of consolidation in the global pharma space has almost fully played out
and it expects both revenue growth (traction in clinical trials, receipt of delayed milestone
payments) and margin expansion (increase in utilisation).
Strong order book in the CRAMs business: Management has stated that its CRAM’s
(Contract research and manufacturing) order book continues to remain strong at about
US$1.1bn
We reduce our EBITDA margin assumptions
We highlight that the company has reported EBITDA margin of 15% in 3QFY11 which is
significantly lower than FY10 EBITDA margin of 20.9% and our FY11-13 forecasts of 18-19%.
Therefore while we make negligible change to our revenue forecasts, we trim our EBITDA margin
assumption by 175-200bp. We also factor in higher interest costs and lower other income which
results in a 21-23% earnings cut to our FY11-13 earnings forecasts.
We cut TP but retain our Buy rating on attractive valuation
Global peers are on an average FY12F EV/EBITDA of 11.3x
We value JOL based on a sum-of-the-parts (SOTP) methodology using FY12F EV/EBITDA
multiples for its various business segments based on domestic/global peer valuations (Table 5).
JOL’s business spans various segments that command different valuation multiples based on
their profitability and future growth prospects.
Higher discount for CMO & DDDS businesses due to weak performance
We now value Jubilant’s CMO and DDDS business at 5% and 15% discount respectively to the
average of its domestic and global peers compared to our ‘at par’ valuation earlier due to their
weak performance. We continue to value its generics business at a 10% premium (due to
presence of high margin specialty pharmaceuticals and better growth prospects) and Life science
ingredients business at 10% discount due to pricing pressures. Consequently, we now value the
company on a blended FY12 EV/EBITDA of 9.9x compared to 10.8x earlier.
We cut our TP by 35% to ; maintain Buy
We factor in the increase in debt and also consider the potential impact of YTM of US$60m on its
US$142m FCCB due in May 2011. Net-net, we cut our TP by 35% to Rs230. Potential recovery in
global outsourcing business (affected by consolidation of Big Pharma and slow regulatory drug
approvals) augurs well for Jubilant – the largest CRAMs player in India. We retain our Buy rating
on potential near-term growth catalysts and attractive valuations, on our analysis.
Risks to our Buy rating
Volatility in commodity prices as JOL consumes and also supplies commodity products.
Slowdown in the global contract manufacturing industry .
Inability to refinance its FCCBs due in May 2011 due to tight financial markets.
Working capital cycle could deteriorate due to re-emergence of liquidity crisis.
Foreign exchange risks
Regulatory risks relating to manufacturing and product quality
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