Jubilant Life Sciences - Turning around; visit note; :: Edelweiss

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Jubilant Life Sciences  (JOL IN, INR 174, Not Rated)

Jubilant’s (JOL) recent performance highlights improvement in the core business. Capacity ramp-up, new orders and improved realizations have enhanced earnings visibility. Management is confident of maintaining current growth rate (over 20%) and operating margins in the range of 22-23%. With improved earnings visibility and focus on balance sheet, we expect the company to trade in its long term 1 yr fwd avg. multiple of 11X.

Capacity ramp-up, dosage form enhance outlook

Capacity ramp-up of vitamin D3 and Pyridine, new contracts and new launches in generic dosage form have enhanced growth visibility for JOL. During H1FY12, revenues grew by 19%, driven by strong growth in product division. JOL expects such momentum to continue over FY12/13 as well. We believe that its decision to demerge non-core business has improved growth visibility.

Operating margins to improve to 22-22.5% level

During H1FY12, EBIDTA grew by 46% to INR4.3bn translating into EBIDTA margins of 21.4% (up 400bps YoY). Such a strong performance was largely driven by a 3.5x increase in services business (17% OPM) and 140bps expansion in products division (25% OPM). Going forward, with a further ramp-up in capacity utilization in CMO business, improved realization in Pyridine and restructuring of Clinsys, we expect operating margins to improve by 100 bps to 22.5% by FY13.

Capex cycle peaks out, focus to improve DE, ROCE

Jubilant has invested over INR41bn during FY07-11 and has guided for INR5bn in capex for FY12. However, going forward, management has indicated an annual capex of INR2bn-INR2.5bn. Company’s focus over the next two years, would be to reduce debt (DE at 1.8x in FY11) and improve the RoCE from the current level of 7%.

Valuations: trading at 40% discount to historical average

We expect JOL to report revenue and earnings CAGR of 18% and 45% over FY11-13E. Historically, Jubilant has traded at one year forward multiple of 11x. At CMP of INR174, the stock is trading at 6.7X FY13 consensus EPS of INR26.