Jubilant Life: Getting back on track

Improvement in margins and lower debt should help increase net profits

The Jubilant Life Sciences stock has been declining in the first half of FY18 on the back of a muted business performance.

A delay in contract manufacturing orders, pricing pressure in generics and integration of an acquisition impacted the company’s margins. The stock has, however, witnessed a recovery since October on expectations of an improvement in growth outlook.

The confidence on the company’s future prospects stems from improving outlook of its pharma segment (radio pharma products) and growing contract manufacturing (CMO) order book. The radio pharma (formulations with radioactive substances used in diagnosis or therapy) prospects has significantly improved after the completion of Triad Pharmacy acquisition. Triad is the second-largest radio pharmacy network in the US, with close to 25 per cent market share in radio pharmacies. Triad’s portfolio is expected to drive growth and bolster Jubilant’s existing and future pipeline of products. 

Triad, however, has lower margins and Jubilant will need to improve on this.  Analysts at HDFC Securities say with the launch of Ruby-Fill (coronary drug) through Triad’s associated pharmacies, the radio pharma segment (ex-Triad) would grow at 20 per cent annually over the next three years.

A growing order book of the contract manufacturing segment as well as an improvement in active pharmaceutical ingredient business should also drive growth. Favourable demand and pricing in vitamins, product launches in crop sciences and improving traction in ethyl acetate supplies will aid growth, as increasing supplies of specialty ingredients drives segment margins.

Despite the Triad acquisition impacting margins, analysts said the stock would see more upside.  Analysts at ICICI Securities expect the revenue and adjusted profits to grow at 15.4 per cent and 18.2 per cent annually over the FY17-20 period, while operating profit margins decline 230 basis points. 

 

Ranbir Singh at Systematix Shares, too, maintained a positive stance for the firm’s focus on specialty business, improvement in life science ingredients business and debt reduction guidance.

Analysts at HDFC Securities say Jubilant Life Sciences is expected to list its pharmaceuticals subsidiary, Jubilant Pharma (JPL), in Singapore in the first half of 2018. After the listing, JPL is likely to trade at 25 per cent higher than the current valuation. The listing will not only help the company unlock value, but also retire Rs 400 crore of debt. 

Barring the weaknesses in the first half of FY18, there has been a significant turnaround in the company’s prospects in the past few years and this is reflected in the returns from the stock that has grown multifold in the last two years. A regular growth in business segments after the resolution of regulatory issues, improving margins, better cash flows contributing to debt reduction (debt equity ratio fell from 1.6 times in FY15 to one time in FY17) have helped.