Jubilant: lucrative deal

ANALYSTS' CORNER

Edelweiss Securities reiterates its "value buy" on Jubilant Organosys. The report states that the company has inked a deal with Eli Lilly for a five-year agreement for drug discovery services. This highlights the breadth of its chemistry skills.

Although the estimates remain unchanged at present, the development is viewed as positive. The company has been making inroads in the research part of the business and is strengthening its presence across the value chain.

Its two subsidiaries, viz Jubilant Biosys and Jubilant Chemsys, will service the agreement as the deal has various offerings. The five-year agreement is for an undisclosed number of NCEs and Jubilant will provide services from lead generation to the clinical stage.

Though small in size, the deal will be lucrative, as margins will be very high (50-60 per cent Ebitda margins). The deal also provides for milestone payments, which is a potential upside and will start immediately, from the next quarter onwards, as the company would have already worked on the projects to ink the deal.

The report projects earnings growth for Jubilant averaging at 34 per cent through FY07, above the sector average, with acceleration in FY07E versus FY06E.

The growth is low-risk, given the stable contract-driven topline and improving divisional-mix-driven bottom line.The stock trades at 21x FY06E and 13.6x FY07E earnings.

Ankur Drugs: expansion binge

Edelweiss Securities, in its visit note on Ankur Drugs, states that the company has a good track record in contract manufacturing and is now looking at increasing revenues tenfold, by FY08E, by increasing capacities in the excise haven, Baddi.

Ankur is a pure contract manufacturing company with domestic pharma companies as clients. Ranbaxy is its largest client, accounting for about 70 per cent of its turnover. Its other customers include Cipla, Torrent and Hetero Drugs. It also does some work on a loan-and-license basis.

The business has stable net margins of 10-11 per cent and operating margins of 16-18 per cent. The move to make Vaibhav Healthcare, a 100-per cent subsidiary, is a big positive.

The swap ratio has currently been set as 1 : 6. Vaibhav enjoys a first-mover advantage in Baddi and now has a gross block of Rs 60 crore, with 24-hour shifts. The move would enable Ankur to scale up revenues and capacities. The stock trades at 19x FY06 earnings.

Dhampur Sugar: sweet timing

Brics PCG Research recommends a "hold" on Dhampur Sugar. The report states that the company has announced its FY05 results. Profits have increased almost tenfold.

It has also announced expansion plans amounting to Rs 400 crore. Net sales of the group grew 63.6 per cent y-o-y to Rs 960 crore on the back of improved realisations and higher volumes.

The average realisation improved to Rs 17 per kg and the total quantity of sugar sold was roughly 0.5 million tonne. The operating margin improved to 16.7 per cent, but was still lower than its peers.

Operating profit for the year stood at Rs 160 crore. Net profit at Rs 88.8 crore was 10 times more than last year's profit. The group sold its Rouzagoan unit, which has a crushing capacity of 7,500 tonne per day and a surplus co-generation capacity of 12 mw, for Rs 182 crore in an all-cash deal.

The written down value of this unit at the end of FY05, stood at Rs 80 crore, resulting in a capital gain of roughly Rs 100 crore. The management expects interest expenses to be reduced by almost 50 per cent on account of restructuring of the interest rate and repayment of high-cost debts.