Previous Recommendation: Neutral

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1 2QFY11 Results Update SECTOR: PHARMACEUTICALS STOCK INFO. BSE Sensex: 20,589 S&P CNX: 6,194 BLOOMBERG JOL IN REUTERS CODE JUBO.BO Equity Shares (m) Week Range 413/255 1,6,12 Rel. Perf. (%) -4/-34/-8 M.Cap. (Rs b) 53.2 M.Cap. (US$ b) November 2010 Previous Recommendation: Neutral Neutral Rs313 2QFY11 performance was below estimates. Key highlights. Topline grew by 5.7%YoY to Rs9.88b (vs estimate of Rs10.49b), while Adjusted PAT increased by 42.3%YoY on a low base (impacted due to Rs428m of forex losses) to Rs821m (vs estimates of Rs948m). Overall, the Pharma and Life Sciences Products and Services (PLSPS) business reported revenue growth of 2.7%YoY to Rs8.5b while Agri & Performance Polymers (APP) business recorded 29%YoY growth to Rs1.38b. EBITDA declined by 16.3%YoY at Rs1.55b and was below our estimate of Rs1.96b. EBITDA margins at 15.7% (down 410bps) were lower than estimate of 18.7% due to pricing pressure and adverse currency movement and adverse product mix in PLSPS segment. Adjusted PAT increased by 42.3%YoY to Rs821m (vs estimate of Rs948m). Adjusted PAT reported growth despite decline in EBITDA on account of low base (impacted due to Rs428m of forex losses) and lower interest outgo due to reduction in debt. We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Customer inventory destocking for CRAMS companies is coming to an end and we expect growth to rebound in FY11 as customers are likely to commence re-stocking. Over the past few years, Jubilant has made two large acquisitions in North America which has strengthened its presence in the sterile segment but has also resulted in a highly leveraged balance sheet. We also believe that some of the past acquisitions (like Draxis) have been made at expensive valuations resulting in extended payback periods. High debt, large FCCB redemption (US$202m in May-2011 including YTM) and low RoCE (8-12%) remain an overhang. Based on our revised estimates the stock is valued at 15.4x FY11E EPS and 12.8x FY12E EPS. Maintain Neutral. Nimish Desai (NimishDesai@MotilalOswal.com); Tel: / Amit Shah (Amit.Shah@MotilalOswal.com)

2 Performance was impacted by muted growth in PLSPS business Jubilant's 2QFY11 performance was below estimates. Topline grew by 5.7%YoY to Rs9.88b (vs estimate of Rs10.49b), EBITDA declined by 16.3%YoY to Rs1.55b (vs estimate of Rs1.96b) while Adjusted PAT increased by 42.3%YoY on a low base (impacted due to Rs428m of forex losses) to Rs821m (vs estimates of Rs948m). Overall, the Pharma and Life Sciences Products and Services (PLSPS) business reported revenue growth of 2.7%YoY to Rs8.5b (contributed 86% of revenues). The performance was impacted by 1) Flat revenues in Proprietary Product and Exclusive Synthesis segment at Rs2.45b due to lower prices. 2) A 1%YoY decline in Specialty Pharmaceutical business (Radiopharmaceuticals and Allergenic Extracts) to Rs605m due to low availability of Isotopes 3) Muted growth of 3% in CMO of sterile and non Sterile Products segment to Rs1.39b primarily due to delay in orders from clients and delay in getting products approvals at customer's end, 4) Flat revenues in Life Science Chemicals segment at Rs1.61b and 5) 19%YoY fall in the revenues from Drug Discovery and Development Services to Rs510m. On the positive side, the Generic dosage form and API business reported YoY growth of 50% and 11% respectively growth led by strong demand. Agri & Performance Polymers (APP) business recorded 29%YoY growth to Rs1.38b on the back of 98%YoY growth in Agri Products business to Rs690m led by increased capacity and nutrition based subsidy for fertilizers. Performance Polymers business reported 4%YoY decline to Rs690m due to lower utilization on account of product rationalization and debottlenecking of capacity in solid PVA. Sales mix (Rs m) 2QFY11 2QFY10 % YoY 1QFY11 % QoQ Prop. Products & Excl Synthesis 2,450 2, , Generic APIs CMO 1,390 1, ,400 (0.7) Contract Research (19.0) 540 (5.6) Total CRAMS 5,260 5, , Specialty Pharmaceuticals (0.8) Generic Formulations Total Pharma Sales 1, Life Science Chemicals 1,610 1, ,760 (8.5) Nutrition Ingredients Healthcare Total PLSPS Sales 8,500 8, , Total APP Sales 1,380 1, ,690 (18.3) Total Revenues 9,880 9, , Source: Company 11 November

3 EBITDA declined by 16.3%YoY at Rs1.55b below our estimates EBITDA declined by 16.3%YoY at Rs1.55b and was below our estimate of Rs1.96b. EBITDA margins at 15.7% (down 410bps) were lower than estimate of 18.7% due to pricing pressure and adverse currency movement and adverse product mix in PLSPS segment. EBITDA Margin Trend EBITDA (Rs m) Margin (%) ,622 1,851 2,251 2,163 1,567 1,549 1Q 2Q 3Q 4Q 1Q 2Q FY10 FY11 Source: Company PAT below estimate due to muted operational performance Adjusted PAT increased by 42.3%YoY to Rs821m (vs estimate of Rs948m). Adjusted PAT reported growth despite decline in EBITDA on account of low base (impacted due to Rs428m of forex losses) and lower interest outgo due to reduction in debt. De-merger of non-pharma (APP) business; Long-term +ve due to focus on Pharma business The management has approved de-merger of the APP business as part of its restructuring exercise. The de-merger will take place by the end of Nov As a first step, SML (JOL's 100% subsidiary) will be merged into JOL. A third-party contract manufacturer (PMSL) will also be merged into JOL. SML is engaged in the manufacturing of pyridine-based chemicals used in the Pharma & Agrochem industries. PMSL is an exclusive contract manufacturer for adhesives for JOL's consumer business. JOL will issue 501,364 shares to existing owners of PMSL as consideration for acquiring the business. At JOL's current market price, PMSL has been valued at Rs190m. In the second phase, JOL's APP business will be de-merged into a separate company to be known as Jubilant Industries (JIL) which will be listed separately (expected by Jan-11). Existing shareholders of JOL will receive 1 share of JIL (face value - Rs10/ sh) for every 20 shares of JOL (face value - Re1/sh). Post de-merger, JOL will be renamed at Jubilant Life Sciences which will continue with the existing business related to Pharma & Life Science (PLSPS) including the CRAMS, Generic Pharma & other businesses. For FY10, the APP business recorded revenues of Rs4.19b (11% of JOL's overall revenues) with EBITDA of Rs165m (2% of JOL's overall EBITDA) 11 November

4 We believe that Jubilant needs to focus on its core business of CRAMS. It currently has presence in CRAMS, Generics, Chemicals and Hospitals. We believe that the Generics business is unlikely to scale up significantly in the coming years given Jubilant's generic product pipeline. High debt, FCCB redemption remains an overhang Jubilant had raised US$310m in FCCBs in 2005/2006 to fund acquisitions and capex. Of these, FCCBs worth US$142m (US$202m incl YTM) are due for redemption in May We believe that these are unlikely to get converted into equity given the high conversion price of Rs413 (effective conversion price of Rs589 taking into account YTM). Cutting earnings estimates by 21% for FY11 and 15% for FY12 Based on the lower than expected 2QFY11 performance, we have cut our EBITDA estimates by 14% for FY11 and 7% for FY12. We have cut our EPS estimates for FY11E by 21% and for FY12E by 15.4%. We now forecast EPS of Rs20.3 for FY11 (23.4%YoY decline) and Rs24.4 for FY12 (up 20%YoY). Outlook and Valuation We believe that the proposed de-merger of the APP business is a positive step as it reflects management's intention to have a focused approach for the PLSPS business. The de-merger will also lead to a better RoCE for JOL as the APP business accounted for only 2% of JOL's FY10 EBITDA but 6% of capital employed. We believe Jubilant is well positioned to exploit the expected increase in outsourcing from India. Customer inventory de-stocking for CRAMS companies is coming to an end and we expect growth to rebound in FY11 as customers are likely to commence re-stocking. Over the past few years, Jubilant has made two large acquisitions in North America which has strengthened its presence in the sterile segment but has also resulted in a highly leveraged balance sheet. We also believe that some of the past acquisitions (like Draxis) have been made at expensive valuations resulting in extended payback periods. High debt, large FCCB redemption (US$202m in May-2011 including YTM) and low RoCE (8-12%) remain an overhang. Based on our revised estimates the stock is valued at 15.4x FY11E EPS and 12.8x FY12E EPS. Maintain Neutral. 11 November

5 : an investment profile Company description 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 Key investment risks 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 Recent developments Jubilant and Eli Lilly have extended Drug Discovery collaboration on successful delivery of Pre-clinical candidates. Valuation and view Slowdown in some of the CRAMS products, declining realizations and product rationalization (for the chemicals business) continues to impact Jubilant's topline growth. We expect an improvement in the CRAMS business only in FY12. The stock currently quotes at 15.4xFY11E and 12.8xFY12E EPS. We continue to believe that the stock price will continue to remain muted till clarity emerges on debt reduction and redemption of US$202m FCCBs (incl YTM). Maintain Neutral. Sector view The CRAMS segment is likely to witness exponential growth over the next few years. Comparative valuations Jubilant Divis Dishman P/E (x) FY11E FY12E P/BV (x) FY11E FY12E EV/Sales (x) FY11E FY12E EV/EBITDA (x) FY11E FY12E EPS: MOSL forecast v/s consensus (Rs) MOSL Consensus Variation Forecast Forecast (%) FY FY Target Price and Recommendation Current Target Upside Reco. Price (Rs) Price (Rs) (%) Neutral Stock performance (1 year) Shareholding Pattern (%) Sep-10 Jun-10 Sep-09 Promoter Domestic Inst Foreign Others Jubiliant Organosys (Rs) - LHS Rel. to Sensex (%) - RHS Nov-09 Feb-10 May-10 Aug-10 Nov November

6 Financials and Valuation 11 November

7 NOTES 11 November

8 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) Fax: (91-22) Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 11 November