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Research
Jubilant Life Sciences - Back on Track - Edelweiss
Posted On : 2012-10-13 09:33:07( TIMEZONE : IST )
Jubilant Life's (JOL) recent performance highlights the improvement in core business. Capacity ramp up, new orders coupled with improved realisation have enhanced the earnings visibility over the next two years. We expect JOL to report 30% earnings CAGR over FY12-14E, driven by (a) 16.5% revenue CAGR and (b) 130 bps margin expansion. With improved earnings visibility and focus on balance sheet, we expect the stock to trade in its long term average of 10-11x. We have set a 12-m PE base target price of INR290 (10x FY14E; 40% upside potential).
Well placed to capture growth opportunities across segments
JOL has multiple growth drivers both in pharmaceuticals as well as life science ingredients (LSI) segment. In pharmaceuticals, CMO of injectibles, generic formulations, radiopharmaceutical along with API will drive growth while LSI segment will ride capacity ramp up of Vitamin B3 (Niacinamide) and Symtet.
Moving up value chain in life science Ingredients
In the LSI segment, where JOL has attained leadership in Pyridine and its derivatives, the company is moving up the value chain by entering into value add products such as Symtet and Niacinamide. The company has invested ~USD90-100mn in these two facilities which at peak can generate USD150-160mn revenue.
Capex cycle peaks out; focus to improve DE, ROCE
With the investment cycle behind us (USD3.5bn capex in FY13), JOL' incremental focus will be on improving productivity and prune debt via internal accruals (INR11bn over the next three years). The company's focus will be to cut DE to 1x (DE at 1.5x in FY12) and improve RoCE from the current 11.0% to 15% in FY14E.
Outlook and valuations: Positive; initiate coverage with 'BUY'
We expect JOL to report revenue and earnings CAGR of 16.5% and 30% over FY12-14E. With improved earnings visibility (30% earnings CAGR), focus on deleveraging balance sheet (expect DE to come down to 1x by FY14) and improved return ratios, we expect stock to trade in its long term one year forward average multiple of 10-11x. At CMP of INR 205, the stock is trading at 7.1x FY14 EPS of INR28.8.
