Hardick Bora

Transcription

1 BSE Sensex S&P CNX 19,990 6,069 Bloomberg JOL IN Equity Shares (m) M.Cap. (INR b)/(usd b) 26.0/ Week Range (INR) 248/154 1,6,12 Rel. Perf. (%) -18/-28/-34 Financials & Valuation (INR b) Y/E March E 2015E Sales EBITDA Net Profit Adj. EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Valuations P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) May QFY13 Results Update Sector: Healthcare CMP: INR163 TP: INR213 Neutral Jubilant Life Sciences 4QFY13 results were in line with estimates. Key highlights: Jubilant Life Sciences (JOL) 4QFY13 operational performance was in line with estimates. Sales were up 18.5% YoY to INR13.88b (v/s est INR13.3b), EBITDA was up 29% YoY to INR2.33b (v/s est INR2.25b), while EBITDA margin stood at 16.8% (v/s est of 17%). JOL reported a net loss of INR310m v/s a net loss of INR635m last year. PAT, adjusted for exceptional items, fell 5% to INR454m (v/s est INR915m), mainly impacted by higher tax outgo and forex losses. Top line growth was led by a 24% growth in Life Sciences business to INR6.9b, while Pharma business grew 13% to INR7b. Growth due to favorable forex was 7%. EBITDA margin expanded by 130bp YoY (in-line), aided by increased capacity utilization in Life Sciences division and better product mix in Pharma business. Guidance: While management refrained from giving specific guidance for FY14, it retained long term guidance of 20% revenue CAGR over FY13-15E, with EBITDA margin at 21% in FY15. Tax rate has been guided at 30% over the next two years, with a capex guidance of INR3.5b. Valuation and view: Post 4QFY13 results, we lower FY14E/15E EPS estimates by 5%/6%, mainly due to the high tax guidance at 30%, against our earlier guidance of 25%. For the FY13-15E period, we expect JOL to record 15.5% top line CAGR, 17% EBITDA CAGR and 60% EPS CAGR (on a low base). EPS CAGR will be much higher than EBITDA CAGR due to large forex losses in FY13. High debt (net debt was INR34.32b as in Mar-13) continues to be our main concern. We believe JOL needs to restructure its balance sheet significantly for the stock to get re-rated. We also believe that some of its past acquisitions (like Draxis) have been made at expensive valuations, resulting in extended payback periods and lower return ratios. The stock trades at 5.2x FY14E EPS and 4.6x FY15E EPS. We maintain Neutral with a target price of INR213 (6x FY15E EPS). Hardick Bora (Hardick.Bora@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Operational performance was in line with estimates Sales were up 18.5% YoY to INR13.88b (v/s est. INR13.3b), EBITDA was up 29% YoY to INR2.33b (v/s est INR2.25b) while EBITDA margins stood at 16.8% (v/s est of 17%). Topline growth was led by a 24% growth in Life Sciences business to INR6.9b, while the Pharma business grew 13% growth to INR7b. Growth due to favorable foreign currency was 7%. The company reported net loss of INR310m against net loss of INR635m last year. PAT Adjusted for exceptional items de-grew 5% to INR454m (v/s est INR915m) mainly impacted by higher tax outgo and forex losses. Adjusted EBITDA growth of 29% - Impacted by lower margins in LSI business While the company has reported a 13% YoY EBITDA growth, 4QFY12 EBITDA included the extraordinary income received from a customer terminating a contract. Adjusted for this, EBITDA has grown 29% YoY to INR2.33b, in line with estimate. EBITDA for the LSI business has doubled to INR950m (on a low base). EBITDA from Pharma Business has de-grown by 5 to INR1.75b, impacted by DDSS business. EBITDA Margin Trend Source: Company/MOSL Key highlights of the conference call The management has maintained long-term revenue guidance of 20% CAGR over FY13-15E and has not given any specific guidance for FY14E. The management is confident of achieving this growth on account of (1) higher utilization of new, expanded and existing capacities in Life Science Ingredients and CMO business, and (2) new product launches as well as expansion in new territories in APIs, Generics and Specialty Pharma businesses. During the quarter, the company reported 18.5% revenue growth led by 14% volume growth and favorable currency. The 24% growth in Life Sciences vertical was led by high growth in PPES and Life Sciences Chemical division. Growth in Pharma division was led by the Generic segment. In Life Science Ingredients business, the company continues to face pricing pressure in proprietary products and nutritional ingredients segments. The growth is coming on the back of increase volumes led by commercialization of new capacities. 9 May

3 FDA warning letter: The company has responded to the warning letter in time and FDA has agreed to majority of the remediation measures outlined by the company. However, there management did not share any timeline for the resolution. They had earlier indicated that the warning letter will not have more than USD10m of revenue impact and USD2-3m of EBITDA impact. EBITDA margins are guided to be 21% by FY15E. This will be driven by hedges taken at favorable rates, new launches, change in product mix and higher capacity utilization in Symtet facility. Tax guidance has been increased from earlier 25% to 30% for the next two years. Capex will be to the tune of INR3.5b over the same period. During the quarter, the company reported exceptional item of INR760m: (1) INR650m pertaining to products under development and (2) INR110 of inventory write-off. JOL has net debt of INR34.32b, down INR1.1b QoQ, of which INR0.7b is on account of repayment. The company targets to bring down the D/E ration to <1x over next 3 years. High debt on the books remains concern; Higher interest cost to impact profitability Net debt on JOL's books stands at INR34.32b. It had raised debt in 4QFY11 for the redemption of FCCBs worth USD142m (USD202m incl YTM). The management is targeting to reduce debt by INR4b in FY14. However, we believe this target to be aggressive given the (1) high working capital requirement, (2) large FY13 capex at INR3.5b and (3) Dividend payment to shareholders. The company is also planning to raise USD250m non-convertible debentures to refinance its outstanding debt. The management indicated that this will not increase overall debt levels. Overall interest cost for FY13 has increased by 10% to INR2.3b, despite debt reduction YoY. We believe the increased interest cost will impact profitability. Outlook and Valuation For the FY13-15 period, we expect JOL to record 15.5% topline CAGR, 17% EBITDA CAGR, and 60% EPS CAGR (on a low base). EPS CAGR will be much higher than EBITDA CAGR as company had reported a large forex losses in FY13. High debt (net debt was INR34.32b as of Mar-13) continues to be our main concern area for JOL. We believe JOL needs to restructure its balance sheet significantly for its stock to get re-rated. We also believe that some of its past acquisitions (like Draxis) have been made at expensive valuations, resulting in extended payback periods and lower return ratios. High debt and low RoCE (15-17%) remain overhangs. The stock trades at 5.2x FY14E EPS and 4.6x FY15E EPS. We maintain Neutral with price target of INR213 (6x FY15E EPS). 9 May

4 : an investment profile Company description Jubilant Organosys Limited is the largest specialty chemicals company in India with high degree of vertical integration along with global scale and reach in almost all its key products. Its business model thus spans pharmaceuticals & life sciences, industrial chemicals and performance chemicals. It has forayed into API business (by acquiring Max India's API operations) and into formulations and regulatory services (by acquiring PSI n.v and PSI supply). Key investment arguments A composite and integrated player with offerings across the pharma and specialty chemicals value chain. Continuous forward integration, with global scale capacities in key products and widespread global presence puts Jubilant on the high growth path. Growing share of the profitable Pharma business, driven by CRAMS, steriles & radiopharmaceuticals business, to ensure improved profitability and earnings visibility. Key investment risk High debt on the books is a concern which may impact the profitability going forward - It also lowers RoCE. Adverse foreign currency movement can impact the revenue and profitability of the company. Recent developments Nil Valuation and view For the FY13-15 period, we expect JOL to record 15.4% topline CAGR, 17.2% EBITDA CAGR, and 60% EPS CAGR. EPS CAGR will be much higher than EBITDA CAGR as company had reported a large forex losses in FY13. The stock trades at 5.2x FY14E EPS and 4.6x FY15E EPS. We maintain Neutral with price target of INR213 (6x FY15E EPS). Sector view The CRAMS segment is likely to witness sustained growth over the next few years led by increased out-sourcing from India. Comparative valuations Jubilant Divis Dishman P/E (x) FY14E FY15E P/BV (x) FY14E FY15E EV/Sales (x) FY14E FY15E EV/EBITDA (x) FY14E FY15E EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Neutral Stock performance (1 year) Shareholding pattern (%) Mar-13 Dec-12 Mar-12 Promoter Domestic Inst Foreign Others May

5 Financials and Valuation 9 May

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