Jubilant Life Sciences -Some green shoots but long way to go… :: ICICI Securities

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Some green shoots but long way to go… • Revenues were flat YoY at | 1445.2 crore, in line with I-direct estimates of | 1461.6 crore, due to the extended plant shutdown in the CMO business to address USFDA issues, regulatory changes in advanced intermediates for the China market and delay in getting product approvals from the USFDA • EBITDA margins declined ~448 bps to 12.8% (I-direct estimate: 9.5%) mainly due to the impact of the CMO business. EBITDA declined 25.8% to | 185.3 crore vs. I-direct estimate of | 138.9 crore • The company posted a net loss of | 11.2 crore (I-direct estimate of | 8.2 crore loss) 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 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 ~14% CAGR 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 EBITDA margins of the pharma business. Also, expenses at the US based Spoken facility to address the USFDA warning letter and subsequent deferral of shipment have led to further deterioration of financials. Going ahead, 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. Because of 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. Of late, however, even this segment is facing issues due to regulatory changes in China and pricing pressure in some sub-segments. We expect LSI to grow at a CAGR of 7% in FY14-17E to | 3567.5 crore. Overall margin improvement still some distance away; maintain SELL The Q3 performance demonstrated some definite improvement in the margin scenario of the pharma segment. However, cracks are now emerging in the LSI segment keeping overall margins in check. We have already emphasised the importance of overall margin improvement for a company like Jubilant where the deteriorating debt/EBITDA ratio is a major cause for concern. With falling margins and dwindling cash flows, the debt servicing will be a tough task for the company. Our revised target price stands at | 138 based on 5x FY17E EV/EBITDA. We continue to maintain SELL rating on the stock as we wait for improvement in the overall margin scenario for the next few quarters.

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http://content.icicidirect.com/mailimages/IDirect_JubilantLife_Q3FY15.pdf