Strong guidance and improvement in profitability encouraging
Action: Retain Buy; strong start to the year
Jubilant reported strong Q1FY13 results with an adjusted PAT of
INR1.09bn, 17% higher than our estimates. Sales and core EBITDA
recorded 31% and 47% y-y growth, respectively. The growth was driven
by higher volumes across business segments (ex-DDDS) and favourable
currency movement. Management has guided for 20-22% revenue y-y
growth for FY13 and EBITDA margins of 21%. Over three years,
management has guided for a revenue CAGR of 20% with an
improvement in margins. At a quarterly adjusted net profit run rate, RoE
and RoCE were at 18% and 15%, respectively. We believe the moderation
in capex intensity and sustainable improvement in return ratios will be key
to the stock’s re-rating. The company has guided for a debt-to-EBITDA
ratio of less than 2.5x and net debt-to-equity of less than 1.0 by FY15.
Catalysts: Sustained increase in volumes and improvement in the
pricing environment
Valuation: Resetting 12m TP to INR330/sh (10x FY14F EPS)
We value Jubilant at 10x FY14F EPS (vs. 12x average FY13/14F earlier).
Our FY14F estimates stand increased by 10% and 15% for revenue and
EBITDA, respectively. We reduce our FY13F and FY12F profit estimates
owing to the non-cash forex losses booked by Jubilant through its P&L.
Our FY14F profit estimate is up by 9%. The stock currently trades at 6.9x
FY13F adj. net profit. We believe valuations are attractive. Maintain Buy.
Strong sales growth
Jubilant reported strong Q1 results with 31% y-y revenue growth. The strong growth was
backed by volume growth of 23% and 8% growth (IQFY13) on account of favourable
currency movement. The pharmaceutical segment, which includes API, generics,
specialty pharma, CMO, DDDS and healthcare, recorded a 45% y-y increase. Growth
momentum was particularly strong in generics and specialty pharmaceuticals, which
together account for approximately 20% of the company’s revenue. Jubilant has
benefited from higher pricing of methyprednisolone in the generics business since
Q2FY12, in our view. In addition, launches in other markets, including generic Lipitor in
Japan, have been a growth driver, in our view. The specialty pharma segment is gaining
traction with the launch of Sestamibi in emerging markets, new order wins and the
expansion of allergy therapy products into new segments, according to management.
The clinical trial business of Drug Discovery and Development Solutions remains a drag.
The ingredient business is facing pricing pressure. The nutritional business is witnessing
pressure on excess supply, and in the life science chemical business, pricing is also soft.
The sequential Q-Q increase in sales from INR5.58bn to INR5.99bn was driven by
higher utilization for the newly commissioned neutraceutical plant (at 65%) and additional
lifescience chemicals capacity, in our view.
EBITDA expands 30% Q-Q and at an all-time high
EBITDA of INR2.74bn is impressive, up 47% increase y-y and 30% increase q-q. This
was the highest ever quarterly EBITDA reported. To a great extent, the improvement
was driven by better realization per USD. As per the company, a one rupee depreciation
in the rupee vs. USD rate results in incremental EBITDA of INR150-180mn annually. The
average INR/USD rate was 54.2 in the quarter ended June 2012 vs. 50.3 in the quarter
ended March. The EBITDA improvement was also driven by higher volume and better
pricing in the pyridine business Q-Q, according to management.
Adjusted profits came in at 17% above expectations
The company reported adjusted profit of INR1.09bn vs. our estimate of INR934mn.
There were exceptional items of INR1.04bn on account of: a) unrealised MTM loss of
INR870mn due to an INR loan swapped into a USD loan; and b) INR170mn on long-term
foreign currency loan.
Strong outlook; management expects a 20% revenue CAGR
over three years with improved margins
We believe that Q1 represents a strong start to FY13 and believe the company is on
track to deliver 20-22% revenue growth and 21% EBITDA margins. For reference, in
Q1FY13, sales growth was 31% and core EBITDA margins were at 22.1%. Over a threeyear
period, management expects to deliver 20% revenue growth y-y with improved
EBITDA margins.
Capex intensity and return ratios are key
We believe a moderation in capex intensity and an improvement in the return ratios will
be key to the stock’s re-rating. The company incurred capex of INR1.08bn in Q1FY13 vs.
full-year guidance of INR3.5bn. The capex intensity in the quarter was higher than the
quarterly run rate implied in guidance. Capex was incurred primarily in the generics
segment, and the company expects the intensity to come down going forward. We
believe at the current quarterly EBIT and net profit run rate, the company is delivering an
RoCE of 14.8% and RoE of 18.7%. The company expects the debt equity ratio to reach
below 1x in next three years compared with 1.4x in FY12.
Change in estimates; 12m target price reduced to INR330
We increase our revenue estimates by 7% and 10% for FY13F and FY14F, respectively.
Our core EBITDA estimates are increased by 6-15%. Greater volumes and favourable
INR/USD drive up our estimates. Our net profit estimate for FY13F is revised downwards
on MTM losses booked in Q1FY13. FY14F estimates are increased 9%.
Our new 12m TP is based on 10x FY14F EPS. We reduce our valuation multiple from
the FY13-FY14F average of 12x earlier. Since we use a higher FY14F earnings base
(vs. FY13-FY14F average earlier), we reduce our valuation multiple. Following this, our
target price declines marginally to INR330 from INR335. We believe the stock’s valuation
at 6.9x FY13F adjusted net profit (adjusted for forex losses) is inexpensive given
favourable growth and improved profitability. We retain our Buy rating.
Risks
Foreign exchange risk: (1) The company derives a large part of its revenues through
exports and operations outside India. (2) Commodity risk: the company uses and
supplies commodity products that are subject to price movements in the global market.
(3) Isotope supply risk: a delay in the availability of radioisotopes would present a risk to
our earnings forecasts. (4) Regulatory risks: regulatory risks pertain to manufacturing,
product quality and approval primarily of pharmaceutical products. (5) Greater than
expected pricing pressure, particularly at Cadista.
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