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MOSL: JUBILANT LIFE SCIENCES (Buy)-In-line earnings; Demerger of Pharma/LSI approved

JUBILANT LIFE SCIENCES: In-line earnings; Demerger of Pharma/LSI approved; 2HFY20 outlook better for LSI on stable pricing

(JUBILANT IN, Mkt Cap USD1.3b, CMP INR561, TP INR650, 16% Upside, Buy)

 

• Pharma segment growth offsets decline in LSI segment: 2QFY20 sales at INR22.6b (in-line) were flat YoY. The 9% YoY growth in pharmaceuticals (64% of sales) was offset by 15% YoY decline in Life Science Ingredients (LSI) (33% of sales). Particularly, Generics segment in Pharma and Specialty Intermediates in LSI grew 20%/32% YoY to INR3b/INR2.6b.
• Higher opex reduces benefit of superior product mix: Gross margin improved 450bp YoY (~50bp QoQ) to 66% due to superior product mix. EBITDA margin grew at lower rate of 90bp YoY to 20.7% (in-line) due to higher employee cost (+130bp YoY as % of sales) and other expense (+170bp YoY as % of sales). Accordingly, EBITDA grew 4% to INR4.7b (v/s est: INR4.6b). PBT was stable YoY at INR3b. However, PAT grew at a higher rate of 19% YoY to INR2.5b (v/s est: INR2.2b) due to lower tax outgo. For 1HFY20, sales/EBITDA/PAT came in at INR44b/INR9b/INR4.4b, up 2%/3%/8% YoY.
• Board approves demerger of Pharma/LSI business: Company’s LSI business with mirror shareholding as that of JLS would be listed on the BSE/NSE. Process would take about nine months. The Pharma entity had sales/EBITDA of INR56b/INR14b and LSI had sales/EBITDA of INR36b/INR4.2b for FY19. Net debt for the Pharma/LSI business is ~INR21b/INR10b.
• Key Concall highlights: (a) Sartans-related issues resolved and supplies have resumed. (b) Remediation cost and non-supply penalty will  continue in 3QFY20. (c) 2HFY20 should be better on stable Acetic acid pricing.