MOSL: JUBILANT LIFE SCIENCES (Buy)-Specialty impressive-Generics/Chemicals hurt performance
JUBILANT LIFE SCIENCES: Specialty impressive; Generics/Chemicals hurt performance
(JUBILANT IN, Mkt Cap USD1b, CMP INR446, TP INR610, 37% Upside, Buy)
- CDMO/ Specialty intermediates (SI)/Nutritional products (NP) lead revenue growth: 1QFY20 sales were up 5% YoY at INR21.8b (our est. INR22.7b), led by 11% YoY growth in the Pharmaceutical segment. Life Science Ingredients (LSI) sales were down 5% YoY to INR8b, impacting overall growth for the quarter. Particularly, CDMO in Pharma and SI/NP in LSI grew 24%/19%/54% YoY. Generics sales grew at moderate rate of 5% YoY and Chemicals sales declined 26% YoY for the quarter.
- Benefit of superior product mix offset by increased operating cost: Gross Margin (GM) improved 370bp YoY to 65.4% with superior product mix. However, EBITDA margin contracted 50bp YoY to 20.6% (our est. 20.2%) due to higher other operating expenses (+280bp YoY as % of sales) and higher employee cost (+140bp YoY as % of sales), thereby offsetting expansion in gross margin. EBITDA at INR4.5b (our est. INR4.6b) grew 3%, largely in line with revenue growth. However, Adj. PAT declined 3% YoY to INR1.9b (our est. INR2.2b), due to higher depreciation and tax outgo.
- Re-organizing business to unlock shareholder value: The Board of Directors has constituted a committee to create separate and focused entities for the Pharma/LSI business. This committee will evaluate options to ensure an optimal capital structure with direct ownership in each business, thereby unlocking shareholder value.
- Valuation and view: We lower our EPS estimate by 8%/4% for FY20/FY21 to INR58/INR65.8 to factor in subdued prospects in the generics and Life Science Chemical business. Accordingly, we arrive at an SOTP-based price target of INR610 by valuing the Pharma business at 8x (unchanged) and the LSI business at 4x (unchanged) on EV/EBITDA basis. We remain positive on JLS on the back of healthy traction in CMO, allergy business of Specialty pharma and SI/NP of the LSI segment. Maintain Buy.
Jubilant Life Science is an integrated pharmaceuticals and life sciences company. Co. offers a range of products and services to its customers across the globe. Co. operates two business segments: Pharmaceuticals and Life Sciences Products and Services and Agri and Performance Polymers ("APP"). In Co.'s Pharmaceuticals and Life Sciences Products and Services segment, Co. manufactures and provides Fine Chemicals and Advance Intermediates for the global pharmaceuticals, agrochemicals and life sciences industry. The products in Co.'s APP segment have various applications in industries such as pharmaceuticals, agrochemicals, textiles and foods.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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