Despite a debt overhang, revenue visibility, a strong business outlook and attractive valuations strengthen the case for investment in Jubilant.
An integrated business model, a strong customer base and focus on value-added products and services should ensure robust revenue growth for CRAMS player, Jubilant Organosys. Sustained sales momentum is likely to help the company double its revenue and earnings to Rs 3,500 crore and Rs 283 crore, respectively for the current fiscal as compared to its numbers in FY2007. While it operates in two business segments, the pharma and lifesciences products and services business contributes over two-thirds to the revenues that the company is banking on to deliver growth.
Outsourcing impetus
The company’s CRAMS division (part of pharma and lifesciences segment) comprises proprietary intermediates, APIs (active pharmaceutical ingredients), contract manufacturing and specialty pharmaceuticals. The company believes that the outsourcing trend will continue to be strong given the cost pressures on large and medium-sized pharma MNCs as well as the government’s thrust on reduction of healthcare costs in the West. The problem area has been China (10 per cent of revenues in Q3) as companies there had been carrying inventory due to the shutting down of plants on account of Olympics/Para Olympics. The company believes that the backlog has been cleared in December last year and the order flow would come back to normal by Q1FY10.
Strong revenues, order book
While there has been a slowdown in outsourcing activity for some CRAMS players, Jubilant has thus far not been affected both on the revenues and the margins front. Its revenues in this segment have grown by 54 per cent year-on-year to Rs 614 crore (organic growth 29 per cent) in Q3. For nine months ended December 2008, the growth has been 61 per cent to Rs 1,723 crore (organic growth 39 per cent). For the CRAMS business and drug discovery and development segment (63 per cent of revenues), the company has a backlog of $930 million (about Rs 4,550 crore) as on December 2008 to be executed over the next five years. Of this, $250 million (Rs 1,200 crore) will get added to the topline in FY10. While the business prospects appear robust, it is the debt on the books which are a cause for concern.
On the higher side
The total debt in the books is Rs 3,923 crore with the net debt of Rs 3,294 crores. While the debt owed by subsidiaries (Rs 1,300 crore) is to be paid over the next seven years and debt on Jubilant (standalone at Rs 800 crore) is to be paid over the next five years, it is the FCCBs where payments are due in FY10 (Rs 250 crore) and FY11 (Rs 1,000 crore), which might cause a strain on finances. Despite a debt to equity ratio of 2.7, with about Rs 600 crore in cash and strong revenue visibility and cash flow, the company believes it should be able to meet its debt payments. It is looking at ways to bring it down and a buyback of the FCCBs at a discount is one of them. As on February 5, 2009, the company has already bought back FCCBs (due in 2011) with a face value of $11.1 million (about Rs 54 crore) at a discount in line with RBI rules and cancelled the same. Additionally, it has invited other FCCB holders to tender their holdings, and the outcome of this would be known by end of the current week.
Margin issues
The EBIDTA margins for the pharma and lifesciences product and services business are steady at about 26 per cent for the December quarter and the company believes that it will be able to maintain them. In the proprietary products and exclusive synthesis business, the company has a cost escalation clause, while in the contract manufacturing business, manufacturing charges are less the 2 per cent of the product cost and will have a minor impact.
| IN DEMAND | |||
| in Rs crore | FY09E | FY10E | FY11E |
| Revenues | 3,539 | 4,247 | 5,096 |
| EBIDTA | 637 | 807 | 1,019 |
| Net Profit | 283 | 369 | 510 |
| P/E (x) | 6.58 | 5.04 | 3.65 |
| E: Estimates | |||
The concern area for Jubilant has been the industrial and performance products (industrial chemicals, fertilisers and animal nutrition), which contributes about 40 per cent to revenues. While revenues for the December quarter moved up 21 per cent to Rs 295 crore, EBIDTA margins were down to 6 per cent from 17 per cent a year ago (down by 11 percentage points). This was primarily on account of higher input costs on raw material purchased earlier and the subsequent price correction on final products due to current global market conditions. The impact on consolidated EBIDTA margins is expected to be just 150 basis points for FY09. Notably, the management believes that the anomaly on the higher input costs should correct in H1FY10.
Investment rationale
The Jubilant Organosys stock has dropped 65 per cent over the last one year as investors have been shunning companies with a high level of debt on their books. While interest costs have moved up and expansion plans have been affected (postponement of its R&D centre costing Rs 100 crore), the company believes that the Rs 250 crore expansion plan for FY10 will meet its critical manufacturing expenditure requirements for the next three years.
With a stable customer roster, measures to reduce debt levels (supported by robust cash flows), good outsourcing prospects and facilities in place, the Jubilant stock, now at Rs 126.35 (PE of 5 based on estimated FY10 earnings), should be able to return about 40 per cent over the next one year.