CD Equisearch Pvt Ltd June 5 th, 2015

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1 June 5 th, 2015 J B Chemicals & Pharmaceuticals Ltd. No. of shares (crore) Mkt cap (Rs crs) 2962 Current Price (6/4/2015) 231 Price Target week H/L (Rs.) / Book Value (Rs) (FV 2) 78 P/BV (FY 16e/17e) 2.8/2.6 P/E (FY 16e/17e) 24.5/21.7 EPS growth (FY16e/17e) -20.3/13.0 ROE(FY16e/17e/) 11.8/12.4 Beta 0.98 BSE Code NSE Code JBCHEPHARMA Bloomberg JBCP IN Reuters JBCH.BO Daily volume (avg. weekly) Shareholding pattern % Promoters 55.8 MFs / Banks / FIs 3.6 Foreign 5.2 Non-Promoter Corp. 3.1 Total Public 32.4 Total As on March 31, 2015 Recommendation BUY Analyst TANYA KOTHARY Phone: + 91 (33) E- mail: tanya.kothary@cdequi.com Company Brief JBCPL, one of India s leading pharmaceutical companies manufactures & markets a diverse range of pharmaceutical formulations, herbal remedies and APIs. JBCPL exports to more than 20 countries across the world and earned more than 56% of its revenue from exports in FY14. Highlights The company plans to invest Rs 140 crs in one of its API plant in Panoli, Gujarat. The company plans to invest in this new capacity and related infrastructure in the next months. The company is ranked 36 th in the industry, with its three brands viz.rantac, (anti-peptic ulcerant), Nicardia (calcium channel blocker) and Metrogyl (amoebicides), featuring among top 300 brands in terms of both value and unit sales (IMS MAT March 2014) In FY14 the company has set up a wholly owned subsidiary company Unique Pharmaceuticals Laboratories FZE in Dubai. The business in Russia and CIS were transferred to this subsidiary. This subsidiary has recorded sales of Rs 69.25crs in FY15. During Q4FY15 the company registered a growth of 11.6% YoY at Rs crs. The operating margins stood at 16.5%. On a consolidated level the operating margins improved by 130 bps to 15.8% in FY15 as against 14.5% in FY14. The company has been paying quite liberal dividend for the last two years (FY13-14) at 150% and this time the company rewarded its shareholder with a onetime special dividend of 500% (over and above 200% as regular) totaling it to 700%. The future outlook for the company remains positive and expected revenues and profit to grow at a CAGR of 12.83% & 16.70%, respectively over e. The stock at the price of Rs 231 trades at 24.5x FY16e earnings and 21.7 x FY17e earnings. Despite marginal decline in EPS over the next two years resulting from equity dilution, we reckon a re-rating of the stock is on cards. Therefore, we recommend BUY on the stock with target of Rs 288 based on 27x FY17e earnings, over the next 9-12 months. Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Income from operations* Other income EBITDA (Other income included) Net profit after extraordinary items EPS EPS growth (%) Equity^ *Includes other operating income, ^ Equity capital would increase due to amalgamation of associates with JBCPL

2 Company Background JBCPL, one of India s leading pharmaceutical company, manufactures & markets a diverse range of pharmaceutical formulations, herbal remedies and APIs. JBCPL exports to many countries worldwide with a strong presence in Russia, Ukraine, CIS countries and South Africa. The Company continues to invest in growing its share in the regulated markets in USA, Europe and Australia. JBCPL has a strong R & D and regulatory set-up for development of new drug delivery system and formulation, filing of DMFs and ANDAs. It s state-of-the-art manufacturing facilities are approved by health authorities of regulated markets. Business Profile Source: JBCPL, CD Equisearch 2 2

3 Overview of the Indian Pharmaceutical Sector The Indian pharmaceutical industry has achieved an eminent global position and has been witnessing phenomenal growth in recent years. It is well known that India is emerging as a world leader in generic pharmaceuticals production, supplying 20% of the global market for generic medicines. The industry accounts for 8% of global production, and is exporting to over 200 countries (1). India is a major vaccine producer and has 18 major vaccine manufacturing facilities. These vaccines are used for the national and international market (150 countries) which makes India a major vaccine supplier across the globe. The Indian pharmaceutical industry is estimated to grow at 20 per cent compound annual growth rate (CAGR) over the next five years, as per India Ratings, a Fitch Group company. Indian pharmaceutical manufacturing facilities registered with US Food and Drug Administration (FDA) as on March 2014 was the highest at 523 for any country outside the US. Source: CMIE& Dept of Pharmaceuticals Strong export growth was recorded over to a CAGR of 18%.This growth will be backed by $92 billion of drugs going off patent in the next three years, increasing traction for generic drugs globally and new generic drug approvals for Indian pharmaceutical companies in different jurisdictions. However, the domestic market revenue growth (CAGR of 10.4 per cent over FY08-FY13) will continue to be moderate. The said exports to the US will continue to grow in the medium term backed by the largest number of United States Food & Drug Administration (USFDA) approved facilities outside the US as well as the largest share of drug approvals over the last few years. The Indian pharmaceutical market (IPM) was valued at Rs 89,244 crores and the retail sector was valued at Rs 75,551 crores, both with a growth of 20 per cent in February 2015 over the same month last year. IPM posted CAGR growth of 11 per cent during the period Multiple factors like prevalence of swine flu-h1n1, high growth in antiinfectives, respiratory and pain market with expansion of big brands has resulted in overall robust IPM growth of 20 per cent for the month. Indian companies continue to drive growth in the market with a growth of 22 per cent in February Cardiac and gastro intestinal, with respective market share of 13 per cent and 11 per cent, constitutes the second and third largest therapies. 3 3

4 Investment Summary Approved state-of-the-art facilities JBCPL has placed high focus on contract manufacturing for projects awarded by multinationals globally and growth of niche branded generics to strengthen stable revenue. The company s state-of-the-art manufacturing facilities with approvals from international health authorities such as US FDA, UK MHRA, EU GMP, TGA Australia, MCC South Africa and MOH Ukraine and its wide range of products across injectable, lozenges, solid and semi-solid along with strong regulatory and development support gives it the needed platform to succeed in this business. Manufacturing facilities Location State Manufactures Facility Approved 1 Kadaiya, Daman Daman lozenges and tablets TGA, Australia 2 Plant TI-10, Panoli Gujarat tablets US FDA 3 Plant IV - 17, Panoli Gujarat Tablets, Injections, Lozenges MCC, South Africa 4 Plant IV -14, Panoli Gujarat Injections, ointments & coldrubs MCC South Africa 5 Plant L -6, Panoli Gujarat Herbal liquids Health Canada 6 Plant D 9, Panoli Gujarat Diclofenac API US FDA, Germany EU - GMP 7 Plant UM 12, Ankleshwar Gujarat Tablets & Liquids NDA Uganda Source: JBCPL, CD Equisearch Global Player The company s thrust is to increase exports. The various initiatives taken in the past to increase exports and increased focus on US business helped achieve a growth of nearly 5% in FY15. API Business continued its upward momentum with sales of Rs crs. In terms of activities, the company s focus on promoting and selling generic products, ANDAs, branded generics including contrast media products, contract manufacturing of various dosage forms, including lozenges contributed to growth. The exports to Rest of the World markets (other than Russia CIS region) continued to show robust performance at Rs a growth of 16.83% in Rupee terms. Accordingly the company will invest in new ANDAs every year. 4 4

5 BSU Contribution to sales in Q4FY15 Capex JBCPL has drawn to invest Rs 140 crs in creation of additional capacity for tablets, liquid, ointments, vials, eye drops and lozenges in order to seize future growth opportunities. In addition the company is also planning to increase the capacity of Diclofenac API Plant. This expansion programme is expected to be completed in next months through internal accruals. This new capacity is going to drive the company s growth in long term. It will boost the exports as 98% of API is exported and 2% is utilized in domestic consumption. In Q4FY15, API sales stood at Rs crs as compared to crs in corresponding quarter last year. Contrast Media JBCPL is one of the top three companies in the field of contrast media in India market. The contrast media products of JBCPL, caters to niche radio-diagnostic products used in CT Scan, MRI and Cath Lab through 30 sales representatives that calls on hospitals and radiologists. Lopamidol, lohexol, Gadopentetate dimeglumine, Diatrizoate Meglumine are some the contrast media products that they market in India. It-licensed a new Ultrasound Contrast Imagining product (Definity) of Latheus Medical Imaging Inc from USA. In FY14 the company achieved a growth of 25% in this segment. In FY15, this segment achieved a growth of 8% YoY at Rs 35.13crs. Renewed thrust in this segment has helped to achieve the stated growth. Prescription products The Indian pharmaceutical sector has come a long way from being primarily generics manufacturer to supplying complex formulations to global pharmaceutical markets and the sector has witnessed a significant evolution over the last few decades. The Indian pharmaceutical market (IPM) was valued at Rs 89,244 crores and the retail sector was valued at Rs 75,551 crores, both with a growth of 20 per cent in February 2015 over the same month last year. IPM posted CAGR growth of 11 per cent during the period The prescription based formulations business of the company registered 16% growth. The company s growth strategy includes focusing on growing therapeutic segments like anti-infective, cardiovascular, pain management and gastrointestinal, new product introductions, deeper penetration in rural market and increased focus on hospital business accompanied by CME and CDE programmes for doctors and special marketing campaigns. During the year, the company also launched products in dermatological, anti-peptic ulcerant and antacid segments. Despite the challenges before the company to grow domestic formulation business and further as the sales in this business essentially depend on prescription generation which is essentially a slow process, the company is quite hopeful of growing the business in this segment. Acute segments contribute 82% of total sales. The current employee s strength in India is 2480 as the company recognizes the important role played by field force in growth of domestic prescription market. 5 5

6 Financials & Valuation The net sales for the quarter Q4FY15 at Rs crores were 11.59% higher against net sales in the corresponding quarter in the previous year. However, this is strictly not comparable Y-o-Y due to commencement of sales and distribution in Russia & CIS countries by the wholly owned subsidiary company during Q1. The operating margins stood at 16.5% in Q4FY15. The domestic formulations business at overall sales of Rs crores registered growth of 13.21% in Q4FY15. The prescription products sales at Rs crores registered growth of 12.29%, while contrast media products sales at Rs crores registered a growth of 21.99%. The formulations exports at Rs crores registered growth of 7.48% during the quarter. The exports of formulations to Rest of the world markets at Rs crores registered growth of 9.38% in Rupee terms. The exports for Russia-CIS markets at Rs crores were 9.57% higher. API sales for Q4FY15 at Rs 25.59crs were 11.52% higher compared to the same quarter last year. The consolidated net sales (including other operating income) at Rs crores in FY15, registered a growth of 12% over the previous year. Consolidated operating profit was at Rs crs.the consolidated net profit was affected by Rs crs on account of depreciation of Russian rouble. The consolidated profit before tax and profit after tax stood at Rs crs and Rs crs respectively. A rich cash balance of approx Rs 607 crs in FY15, keeps the scope for inorganic initiative by the company. The company s capex plan of Rs 140 crs is progressing well. Capex will be funded through the internal accruals. We believe consolidated sales numbers should grow at a CAGR of 12.83% over the period of FY15-FY17e. 6 6

7 Risks & Concerns Drugs (Prices Control) Order, 2013 The company has faced certain issues arising out of Drugs (Prices Control) Order, 2013 which has reportedly impacted the industry s sales for some time during the year. Any such future changes in these norms can impact the revenue of the company going forward. Export The company exported nearly 19% to Russia & CIS in FY14. The current political situation in Russia and Ukraine and Depreciation of rouble against US Dollar has impacted the business. These are potential markets for the company s products and the company is watching the situation in these markets. Margin pressure Margins have been under pressure mainly due to sluggishness in sales and increasing competitive intensity. If the slide in sales persists, then maintaining margins would get tougher. The rising costs on one hand and price control on other remain a concern. Cross Sectional Analysis Company Equity* CMP^ Mcap* Sales*# Profit* OPM NPM# ROE Mkt cap / sales P/BV P/E Sun Pharma.Inds Dr Reddy's Labs Aurobindo Pharma Glenmark Pharma Piramal Enterprise JBCPL ^CMP as om 4/6/2015 * in Rs Crs # Sales & NPM FY15 ** ROE FY15 7 7

8 Financials Quarterly Results Standalone Figures in Rs crs Q4FY15 Q4FY14 % chg. FY15 FY14 % chg. Income from operations Other income Total income Total expenditure PBIDT Interest Depreciation PBT Tax PAT Extraordinary item Adjusted net profit EPS (F.V. 2) Consolidated Income Statement Figures in Rs crs FY13 FY14 FY15 FY16e FY17e Income from operations Growth (%) Other Income Total Income Total Expenditure EBITDA Interest EBDT Depreciation Tax Reported PAT Extraordinary item Adjusted Net Profit EPS (Rs.)

9 Consolidated Balance Sheet Figures in Rs crs FY13 FY14 FY15 FY16e FY17e SOURCES OF FUNDS Share Capital Reserves Total Shareholders Funds Total Debt Other Liabilities Total Liabilities APPLICATION OF FUNDS Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventory Sundry Debtors Cash and Bank Loans and Advances Total CA & LA Current liabilities Provisions Total Current Liabilities Net Current Assets Net Deferred Tax Other Assets Total Assets

10 Key Financial Ratios FY13 FY14 FY15 FY16e FY17e Growth Ratios Revenue (%) EBIDTA (%) Net Profit (%) EPS (%) Margins Operating Profit Margin (%) Gross Profit Margin (%) Net Profit Margin (%) Return ROCE (%) RONW (%) Valuations Market Cap / Sales EV/EBIDTA P/E P/BV Other Ratios Interest Coverage Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Asset Turnover Total Asset Turnover Debtors Turnover Inventory Turnover Creditors Turnover Working Capital Turnover

11 Recommendation JBCPL s wide geographical presence in international markets and strong product portfolio with high growth brands and strong marketing capability gives positive outlook for overall business of the company. The company has crossed the iconic milestone of Rs 1000 cr sales mark in FY14. The company has embarked on to the next phase of journey in July 2011, post sale of the Russia-CIS OTC business, and the company has made a comeback in just three years by effectively focusing on growth markets internationally. The supply agreement with Cilag GmbH International ( Cilag ), a wholly owned subsidiary of Johnson & Johnson has been functioning smoothly. The increase in per capita income, and in turn the increase in per capita consumption of drugs, improved healthcare access and increasing health awareness are expected to continue to aid growth opportunity in domestic formulations business. As successful penetration into new markets will accelerate the next level of growth, the company believes that its well established brands will be the strong pillar around which the company will grow. The international business poses challenges, such as increased competition, rapidly changing regulatory environment and increasing span of price controls in some markets. However, the company is optimistic about its good growth prospects. The R&D division of the company continues to play an important role in the company s growth. R&D is currently focused on the new formulations development and ANDAs filings. The company has enhanced its focus on US market and plans to file new ANDAs and is also considering backward manufacturing of APIs used in these ANDAs to make the business more profitable. JBCPL has envisaged capex of Rs140 crs to be spent in next months. This capex is progressing as per schedule. The consolidated sales in FY15 registered a growth of 12% YoY. The political situation in Russia and Ukraine and depreciation of rouble against US dollar also impacted the business. The situation has improved in these markets after April, but the company is cautiously watching the developments in these markets. The company has around Rs 607 crs (Cash + Investments) as on FY15. The company does not plan to invest this money in haste and will invest it when the right opportunity emerges. The company has a consistent, strong free cash flow annually, with a low debt-equity of 0.1x. With the commencement of the sales and distribution of products from its wholly owned subsidiary in Dubai, we expect revenues and profit, CAGR of 12.83% & 16.70% respectively over e. The stock at the price of Rs 231 trades at 24.5x FY16e earnings and 21.7 x FY17e earnings. Despite marginal decline in EPS over the next two years resulting from equity dilution, we reckon a re-rating of the stock is on cards. Therefore we recommend BUY on the stock with target of Rs 288 based on 27x FY17e earnings, over the next 9-12 months

12 DISCLOSURE & DISCLAIMER: CD Equisearch Private Limited (hereinafter referred to as CD Equi ) is a Member registered with National Stock Exchange of India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited (Formerly known as MCX Stock Exchange Limited). CD Equi is also registered as Depository Participant with CDSL and AMFI registered Mutual Fund Advisor. The associates of CD Equi are engaged in activities relating to NBFC-ND - Financing and Investment, Commodity Broking, Real Estate, etc. CD Equi has applied for registration under SEBI (Research Analysts) Regulations, Further, CD Equi hereby declares that No disciplinary action has been taken against CD Equi by any of the regulatory authorities. CD Equi/its associates/research analysts do not have any financial interest/beneficial interest of more than one percent/material conflict of interest in the subject company(s). CD Equi/its associates/research analysts have not received any compensation from the subject company(s) during the past twelve months. CD Equi/its research analysts has not served as an officer, director or employee of company covered by analysts and has not been engaged in market making activity of the company covered by analysts. This document is solely for the personal information of the recipient and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved) and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. CD Equi or any of its affiliates/group companies 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. CD Equi has not independently verified all the information contained within this document. Accordingly, we cannot testify nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While, CD Equi endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory compliance or other reasons that prevent us from doing so. This document is being supplied to you solely for your information and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither, CD Equi nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. CD Equisearch Private Limited (CIN: U67120WB1995PTC071521) Registered Office: 37, Shakespeare Sarani, 1 st Floor, Kolkata ; Phone: +91(33) ; Fax: +91(33) ; Corporate Office: 10, Vasawani Mansion, 2 nd Floor, Dinshaw Wachha Road, Churchgate, Mumbai ; Phone: +91(22) /0653; Fax: +91(22) 2283, 2276 Website: research@cdequi.com SEBI Regn No.: NSE-CM: INB , NSE-FO: INF , NSE-CD: INE , BSE-CM: INB , BSE-FO: INF , MCX-SX-CM: INB , MCX-SX-FO: INF , MCX-SX-CD: INE , DP: IN-DP-CDSL