JB Chemicals & Pharmaceuticals - Decent performance in challenging times - ICICI Securities

JB Chemicals & Pharmaceuticals' (JBCPL) Q2FY21 performance was strong at the operating level, though revenue growth was impacted by deferment of exports sales worth Rs570mn (12.9% of total sales) to Q3FY21. Consolidated revenue declined 2.8% YoY to Rs4.4bn while EBITDA margin improved 280bps YoY to 24.8%. However, adjusted PAT dropped 21.0% to Rs739mn due to low base of tax rate. There has been change in management during Q2FY21 as KKR took over the control by acquiring equity stake from promoters and has appointed Mr Nikhil Chopra as CEO who has been with Cipla for 24 years including 5 years as CEO-India business. We remain positive considering ~45% of total revenues and ~55% of EBITDA contribution is from domestic formulations with strong growth visibility. Reiterate BUY with a revised target price of Rs1,114/share.

- Strong operating performance: India business grew 4.5% YoY driven by chronic portfolio despite acute segment being weak due to lockdown. We believe the growth would improve to double digit in coming quarters as lockdown restrictions have been eased and industry growth has also improved. We expect India revenue to grow at 12.3% CAGR over FY20-FY23E led by continued improvement of MR productivity and the price hike in Metrogyl. Exports revenue dropped 9.4% due to deferment of sales worth Rs570mn. Adjusting for this deferment, growth would have been 14.7%. Gross margin improved 630bps aided by better revenue mix and EBITDA margin was up 280bps despite lower exports revenue.

- Focus on multiple growth levers by new management: As per new management, the company will be leveraging the established strong base and will focus on future value creation through: 1) portfolio ramp-up and build larger brands in India business, 2) Augmenting R&D activities for product filings in regulated and semi-regulated markets, 3) expansion of lozenges business to support CMO business and 4) focus on accelerating growth through business development and strategic partnerships including synergistic acquisitions. We believe successful execution would further accelerate the growth momentum.

- Outlook: We expect 11.3% revenue and 18.0% PAT CAGR over FY20-FY23E led by a healthy 12.3% CAGR in India business and EBITDA margin expansion of 390bps to 25.2. We estimate free cashflow generation of ~Rs9.2bn over the next three years, which can be utilised for shareholder rewards and business expansion.

- Valuations and risks: We raise our FY21E-FY22E EPS by 15-18% primarily on higher margins led by saving in operating expenses. We also raise target P/E(x) to 20x from 16x earlier considering significant improvement in return ratios (RoIC 28.6% by FY23E) and focus of new management on accelerating growth. We maintain BUY rating with a revised target price of Rs1,114/share based on 20xSep'22E EPS (earlier: Rs722/share). Key downside risks: Slowdown in India growth, pricing pressure and currency volatility.

Shares of J.B.CHEMICALS & PHARMACEUTICALS LTD. was last trading in BSE at Rs.955.7 as compared to the previous close of Rs. 968.25. The total number of shares traded during the day was 8811 in over 1454 trades.

The stock hit an intraday high of Rs. 968.25 and intraday low of 950. The net turnover during the day was Rs. 8417201.

Source : Equity Bulls

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