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Jubilant Life Sciences (JOL IN, Rs289.00, Buy) – Gradual recovery ahead
The demerger of the low-margin APP business augurs well, in our view. We cut our earnings
and TP to factor in the demerger and ongoing margin pressure. We expect a gradual
recovery as margin pressure eases (pricing improvement) with growth drivers (capex
benefits, strong demand in API) remaining intact. Buy.
Demerger of APP business – a positive
The demerger of the low-margin Agri & Performance Polymers (APP) business (16% of
1HFY11 revenues, 11% of EBITDA) has finally been agreed with the effective date fixed at
1 April 2010. Notwithstanding the recovery in this business, we believe this is a positive
development due to the associated low margins (vs the Pharma segment) and the disparate
businesses taking up management bandwidth.
Gradual recovery expected with margin pressure easing and upcoming growth drivers
While we are disappointed at the sluggish 1H performance, we maintain our positive outlook
on the stock. With pricing improvements in its proprietary business (pyridines) and high-cost
raw material inventory being exhausted in the Acetyls business, management has guided for
a gradual margin recovery from 3Q onwards. Besides margin improvement gains, other key
near-term key growth drivers we see are capacity expansion benefits in pyridines (25% of
FY10 revenues, 20% increase in capacity), niacinamide/vitamins (5%, 200% increase) and
API business (7%, sartans facility getting operational) from 1QFY12. We also foresee a strong
demand uptick in the API (sartans, donepezil, etc) and dosage businesses. The strong order
book in CRAMs (custom research and contract manufacturing) and the recovery in global
outsourcing (affected by the consolidation of Big Pharma and slow regulatory drug approvals)
augur well for Jubilant – the largest CRAMs player in India based on revenues.
We factor in demerger and margin pressure; we cut forecasts/TP but maintain Buy
We factor in the APP business demerger as well as margin pressure and cut our FY11/12F
EBITDA by 24-28%. We also factor in the increase in debt and roll forward our valuation to
FY12F. Our revised target price of Rs355 (earlier Rs455) implies a blended FY12F EV/EBITDA of
10.8x. Maintain Buy.
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