Jubilant: Radiopharma contract a major trigger

Most analysts positive on the scrip, given its falling debt, pricing power and new launches

The Jubilant Lifesciences stock has gained 15% in two trading sessions, after the company signed a 39-month contract to supply radiopharma products, used in diagnostics and treatment. The contract covers 75% of the US distributors and all key products.

While the size of the incremental gains is not known, the impact would be significant, as some of the key products have no competition. Analysts at Nomura estimate every 10% increase in radiopharma sales could impact the earnings per share in FY18 by 5.5%. There would be higher volumes and better realisation for the radiopharma business, expected to account for 12% of overall revenue in FY17.

Among the drivers for earnings are new launches in the radiopharma pharma segment. These include Rubyfill for heart scanning and a drug for neuroblastoma (cancer) in children. While the former is expected to have an addressable market size of $250 million by 2020, the later has an annual one of $100 million, believe Nomura analysts.

Other triggers include the order backlog for its contract manufacturing operations at about $550 mn over the next three to four years. The business, 10% of sales, could see strong growth after resolution of a warning letter from the regulator. Pricing power in its life science ingredient business (45% of revenue) would also be a trigger. The company had announced a price increase of up to 15% last month for its Vitamin B3, among other products.

The stock has already been re-rated between July and October, the price more than doubling to about Rs 690. This was on the back of lower debt, a new launch line-up and growth prospects. Among the key triggers was the net debt reduction of Rs 760 crore, which helped debt to equity came down from 1.6 times in FY16 to 1.1 times at the end of September. This would lead to better cash flow and healthier return ratios in this financial year and the next one.

Analysts at Prabhudas Lilladher say with limited competition in radiology products in the US and better visibility of utilisation at its contract manufacturing plants, the operating profit margin at 30-34% in US generics is currently the highest among all Indian peers. Not surprising, then, that most analysts tracking the stock have a ‘buy’ rating. Given the latest upgrades and price targets of above Rs 850, there is an upside of at least 14% from the current level. Investors could look at the stock on any dips.