Jubilant Life Sciences -Outlook remains hazy… • :: ICICI Securities, PDF link

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Outlook remains hazy…
• Revenues declined 4.5% YoY to | 1371.1 crore, far below I-direct
estimate of | 1563.0 crore. The delta was on account of the 1)
extended plant shutdown in the CMO business (Spoken facility) to
address USFDA issues, 2) loss of business to accommodate changes
in regulatory requirements in advanced intermediates for the Chinese
market and 3) delay in getting product approvals from the USFDA
• EBITDA margins declined ~1077 bps YoY to 8.1% (I-direct estimate:
14.5%) mainly due to the impact of the CMO business. EBITDA in
absolute terms declined 59% to | 111 crore
• The company posted a net loss of | 94.1 crore (I-direct estimate:
| 54.9 crore profit) on the back of low EBITDA margins and an
increase in interest and taxation
Integrated CRAMS player but struggling due to legacy debt burden
Jubilant is the largest Indian CRAMS player with a vertically integrated
business model. It derives ~50% of sales from the CRAMS spread among
various business verticals. However, in its pursuit of building capacity and
creating multiple revenue heads, the debt situation has not improved over
the years. As most of the debt had been US dollar denominated, the
sharp INR depreciation over two or three years worsened the debt
situation further. Similarly, it has not witnessed meaningful cash flows
due to margin pressure. Hence, the D/E and debt-EBITDA ratios have
remained at elevated levels.
Pharmaceuticals business segment offers potential but lumpy in nature
The pharmaceuticals business has grown at a CAGR of ~15% in FY10-14
driven by generics and specialty pharma. However, pricing pressure in
the drug discovery business and some formulations in the US have put
consistent pressure on the EBITDA margins of the pharma business. In
addition to this, expenses at the US based Spoken facility to address the
USFDA warning letter and the subsequent postponement of shipment
have led to further deterioration of the financials. Going ahead, the
resolution of the warning letter and traction in the US generics and API
business will be keenly watched.
LSI segment mostly commoditised but offers stable returns
Life science ingredients (LSI) cater to more routine customers with
committed requirements. Due to the commodity nature, margins in this
segment are ~15%. The business has grown at a CAGR of ~14% in FY10-
14. However, it is more consistent than the pharma segment. We expect
LSI to grow at a CAGR of 8.7% in FY14-16E to | 3636 crore.
Significant headwinds still persist; maintain SELL
The Q2 performance was disastrous as the hitherto safe and consistent
LSI business also witnessed cracks on account of Chinese regulatory
changes. The Spoken CMO (pharma) facility continued to bleed on
account of the USFDA embargo. Although it has started on a lower scale,
it needs to be seen how fast it gets normalised. All other legacy issues
such as falling margins and worsening gearing continue to remain major
stumbling blocks. With falling margins and dwindling cash flows, debt
servicing will be a tough task for the company. Our revised target price
stands at | 123 based on 5x FY16E EV/EBITDA. We advise investors to
stay away from the stock at this juncture.

LINK
http://content.icicidirect.com/mailimages/IDirect_JubilantLife_Q2FY15.pdf