INITIATING COVERAGE: Divi’s Laboratories Jubilant Life Sciences
Manoj Garg +91 22 6623 3302
[email protected]
Perin Ali +91 22 6620 3032
[email protected]
Edelweiss Securities Limited
Pharmaceuticals
Executive Summary
Positive trends in major lead indicators — R&D spend, biotech funding, project pipeline and outsourcing penetration—reinforce our optimism in the long term traction in pharma outsourcing space. Moreover, loss of exclusivity on patented products, dwindling R&D productivity and internal cost pressures have made outsourcing imperative for global pharma majors. We (Click here for strongly believe that a combination of expanding video clip) pipelines and shrinking internal resources will further spur outsourcing. Additionally, Asian countries are garnering higher share of the CRAMS space as the global economic balance is shifting from the West to the East.
Consolidation, cost cutting, currency cripple CRAMS in FY09‐11 Over FY09‐11, the CRAMS industry across the globe was severely crippled by global consolidation, cost cutting, inventory rationalisation, a funding crisis among small biotech companies and adverse currency fluctuations. Growth of three major Indian CRAMS players had plunged from 34% CAGR over FY06‐09 to 5% CAGR over FY09‐FY11.
Outlook brightens as revenue traction, funding improve since FY11 Post a rough patch where growth had almost came to a grinding halt, most CRAMS companies have seen a revenue traction over the past 4‐5 quarters. Even net new business and book‐to‐bill ratios of global CRAMS majors have enhanced significantly. Moreover, funding for small and mid‐sized biotech companies is beginning to improve, which bodes well for CRAMS companies.
Growth is here to stay as global pharma majors face harsh realities Loss of exclusivity on patented products, a dwindling R&D pipeline and bid to realign business models to new realities have made pharma outsourcing imperative for global pharma majors. We strongly believe that a combination of expanding pipelines and shrinking internal resources will further spur outsourcing.
Valuations yet to catch up with prospects; initiating Divis, Jubilant Post its strong operating numbers, our CRAMS universe has jumped up by almost 15% though it still trades at 40% discount to its May 2008 valuations, thereby leaving a significant scope for multiple expansion. We expect valuations to move up going forward with most CRAMS players projecting quality earnings as a favourable macro environment helps improve growth visibility while the focus on deleveraging balance sheet betters return ratios. We initiate coverage on Divi’s (BUY/SP) and Jubilant Life Sciences (BUY/SP).
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Edelweiss Securities Limited
Pharmaceuticals
Contents What impacted growth in FY09-11? ........................................................................................ 3 What has changed?.................................................................................................................. 7 Growth is here to stay............................................................................................................ 10 But, valuations yet to catch up .............................................................................................. 14
Companies (Initiating Coverage) Divi’s Labs .............................................................................................................................. 17 Jubilant Life Sciences ............................................................................................................. 37
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Edelweiss Securities Limited
Pharmaceuticals
What Impacted Growth in FY09-11? Global consolidation, cost cutting, inventory rationalisation and funding crisis to small biotech companies coupled with adverse currency fluctuations had impacted the CRAMS industry across the globe in FY09-11. Growth of three major Indian CRAMS players had plunged from 34% CAGR over FY06-09 to 5% CAGR over FY09-11.
Chart 1: Growth of Indian CRAMS players dwindled during FY09-11 120.0 90.0
(%)
60.0 30.0 Global consolidation, cost cutting and inventory rationalization impacted CRAMS industry
0.0 (30.0) FY07 Divis
FY08
FY09 Jubilant
FY10
FY11
FY12
Dishman Source: Company, Edelweiss research
Global consolidation impacted order flow During 2008-10, there has been a sharp rise in mergers and acquisitions within global pharma as declining R&D productivity, delay in new approvals, incremental pressure on developed economies to cut healthcare costs followed by huge patent expiries made it imperative for big pharma to consolidate. While rationale behind the consolidation was largely to improve operational efficiency and strengthen the late stage pipeline, it negatively impacted CRAMS companies as global majors switched to cost rationalisation mode in order to conserve cash.
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Pharmaceuticals Table 1: Key global M&A deals during 2008-10 S. No. Date Value Acquirer 1 Mar-07 14.5 Schering Plough 2 Jul-07 1.7 GlaxoSmithKline 3 Aug-08 1.4 Shionogi 4 Oct-08 6.5 Eli Lilly 5 Jan-09 68.0 Pfizer 6 Mar-09 46.8 Roche 7 May-09 1.0 Johnson & Johnson 8 Sep-09 2.6 Dainippon Sumitomo 9 Nov-09 41.1 Merck & Co. 10 Jul-09 3.6 GlaxoSmithKline 11 Feb-10 4..5 Abbott 12 May-10 3.7 Abbott 13 Oct-10 3.6 Pfizer 14 Dec-10 51.0 Novartis
Consolidations among larger players resulted in inventory rationalisation
(USD bn) Target Organon Reliant Pharma Sciele Pharma ImClone Wyeth Genentech Cougar Biotech Sepracor Schering-Plough Stiefel Solvay Piramal Healthcare unit King Pharma Alcon
Source: Industry, Edelweiss research
Global pharma majors pruned inventory levels Global consolidation coupled with economic crisis necessitated pharma majors to prune inventory levels across manufacturing facilities to boost operational efficiency and reduce working capital. Global majors have cut inventory levels from a peak of two to three years to a more manageable 9-12 months over FY09-11, which impacted the growth rate of CRAMS companies during the same period (see Chart 1).
Lower R&D spending impacted CRO industry R&D spending has been a key growth driver of the CRO (contract research) industry. Historically, an increasing amount of money was allocated to a growing number of drugs under development, coupled with ever-expanding size of clinical trials which led to midhigh double–digit growth in R&D spend. However, owing to funding crunch in small biotech companies and research productivity challenges for big pharma, R&D spending was pruned across all levels. This is evident from the fact that R&D expenditure for companies have come down from the peak of 15% in CY06-07 to negative 2-3% in Q1CY09. Moreover, companies stated to concentrate more on late stage molecules over early stage molecules.
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Edelweiss Securities Limited
Pharmaceuticals Chart 2: R&D spending has declined 20.0 Pharma consolidation and earnings management
15.0
R&D expenditures have come down from the peak of 15% to negative 2-3%
Recession and more pharma consolidation
(%)
10.0 5.0
Historical trend 8.5%
0.0
Q1 CY10
Q1 CY09
Q1 CY08
Q1 CY07
Q1 CY06
Q1 CY05
Q1 CY04
Q1 CY03
Q1 CY02
Q1 CY01
Q1 CY00
Q1 CY99
Q1 CY98
(5.0)
Source: William Blair & Co, Parexel, Edelweiss research
While low activity on R&D had relatively lesser impact for Indian CRAMS companies due to their low exposure in contract research, however, companies like Dishman, Jubilant Life Sciences and Biocon bore its brunt.
Earnings hit by upfront investment, adverse currency movement CRAMS, being a capital intensive business, needs upfront investments. Owing to favourable macro outlook and strong growth, most CRAMS companies in India made significant investments during FY07-09.
Chart 3: Companies added huge capacities in anticipation of strong order flows 30,326 CRAMs companies invested heavily via both organic and inorganic routes
(INR mn)
24,261 18,196 12,130 6,065 0 FY07 Jubilant
FY08
FY09 Divis
FY10
FY11
Dishman Source: Company, Edelweiss research
Jubilant and Dishman invested heavily via both organic as well as inorganic routes, resulting in higher foreign currency debt on their balance sheets. Slowdown in earnings coupled with overleveraged balance sheets and adverse currency movements had negatively impacted the bottom lines of these companies.
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Edelweiss Securities Limited
Pharmaceuticals 58.0
1,582
52.8
1,221
47.6
859
42.4
498
37.2
(INR)
(INR mn)
Chart 4: Adverse currency movement has led to increase in MTM losses 1,944
136
32.0 FY08
FY09 Jubilant ForEx Loss
FY10
FY11
FY12 INR/USD
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
What Has Changed? Revival in industry Post a rough patch in FY08-10 (where growth had almost stalled), most CRAMS companies have posted better traction in revenue over the past four-five quarters. Even the performance of global players indicates that overall environment for outsourcing is improving and growth will accelerate going forward. This is also evident from the fact that net new business and book-to-bill ratios of global CRAMS majors have improved significantly. While CRAMS players across the globe have posted recovery, Asian CRAMS players have registered higher growth than their western counterparts.
Chart 5: Consistent improvement in growth traction across CRAMS players 63.0
Both domestic and global CRAMs players witness improved traction
45.8
(%)
28.6 11.4
Divis
Jubilant
Shasun Pharma
Q1 FY13
Q4 FY12
Q3 FY12
Q2 FY12
Q1 FY12
Q4 FY11
Q3 FY11
Q1 FY11
(23.0)
Q2 FY11
(5.8)
Dishman
Source: Company, Edelweiss research
Chart 6: Uptick in net orders & book to bill ratio for global CRAMS players 2.5 7,000
1,400
Covance
Paraxel
Icon
Covance
Paraxel
Icon
Covance
Paraxel
Q2CY12
Q1CY12
Q4CY11
Q3CY11
0
Q2CY11
Jan - Mar'12
CY11
CY10
CY09
Q2CY12
Q1CY12
Q4CY11
Q3CY11
Q2CY11
Q1CY11
Q4CY10
0
360 180
CY08
0.5
2,800
CY07
(X)
1.0
540
Q1CY11
4,200
Q4CY10
1.5
Net order book
720
(USD mn)
5,600
(USD mn)
2.0
0.0
900
Order backlog
Net book to bill ratio
Icon
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals Biotech funding is improving Funding crunch to small and mid biotech firms was one of the key reasons for R&D slow down, however, the funding scene is improving. As seen in chart 7, the overall funding continues to rise, however, the industry has witnessed a shift in the funding sources with partnering and debt providing the larger proportion. Similarly, while venture capitalists (VCs) are betting more money on late stage candidates, early stage companies continue to face headwinds.
Chart 7: Uptick in biotech funding 19,800
Biotech funding over the past few quarters has improved consistently a positive for CRAMS companies USD in Millions
16,000 12,200 8,400 4,600
02Q1 02Q3 03Q1 03Q3 04Q1 04Q3 05Q1 05Q3 06Q1 06Q3 07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1 10Q3 11Q1 11Q3 12Q1
800
Financing
Partnering
Cash in hand Source: Bioworld, Edelweiss research
Chart 8: Source of biotech funding 81.0
(USD in Billions)
64.8
Partnerships and debt are key sources of funding for small and medium biotech firms
48.6 32.4 16.2 0.0 CY05 IPO
CY06 Follow-ons
CY07 PIPEs
CY08
CY09
Private
Debt
CY10
CY11 Partnering
Source: Covance; Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals Chart 9: Venture capital investments in bio-pharma within US 6,000
(USD mn)
4,800 3,600 2,400 1,200 0 CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 First time investment
Follow-on investments Source: Pharmatech; Edelweiss research
Improving R&D pipeline of small and mid-sized pharma companies Small and mid-sized biotech companies’ share of pipeline has grown from 79% in CY08 to 82% in CY10, which bodes well for CRAMS companies as these boutique R&D firms focus their entire resources on R&D rather than manufacturing. Numerous channel checks and lead indicators suggest that small and mid-sized biotech companies have pruned their decision making time and ramped up spending. We highlight that if this trend continues, it will spur demand across the development spectrum, but particularly in early stage, where small biotech firms tend to focus on buying power.
Easy funding is available for late stage candidates while early stage companies continue to struggle for capital
82.0
7,616
80.6
6,028
79.2
4,440
77.8
2,852
76.4
(%)
(No of projects)
Chart 10: Small and mid-sized bio-pharma firms own more than 80% of IPR 9,204
1,264 CY07 Top 25
CY08 All others
75.0 CY09 CY10 % Small & mid-sized biopharma Source: Parexel
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Edelweiss Securities Limited
Pharmaceuticals
Growth is here to stay Global R&D spend on the rise Post slowdown in R&D spending in 2009 and 2010, it has ramped up over the past four-five quarters across all three segments of players (from large pharma to small biotech firms). As per recent survey conducted by Pharma source, while large pharma expects acceleration in spending by three percentage point, mid and small biotech pharma expects R&D spending to surge 6 and 14 percentage points, respectively. Overall, global R&D spending is likely to increase from USD116bn in CY2011 to USD132bn by CY2015.
R&D spending is likely to increase from the current USD116bn to USD132bn by 2015
Chart 11: Increase in R&D spends to bolster CRAMS growth 140
Chart 12: R&D investments expected to rise 20.0 16.0
(R&D % of sales)
(USD bn)
130
120
110
12.0 8.0 4.0
100
0.0 CY10 90 CY10
CY11
CY12
CY13
CY14
CY15
Large Pharma
CY11
CY12E
Midsize Pharma
CY13E Small Pharma Source: Parexel
Drugs worth USD75bn set to lose exclusivity Drugs worth USD75bn will be going off patent over the next three years (CY12-15), which would result in 10-40% revenue loss for global major players. We believe that global players are finding it hard to replace blockbuster drugs and there is sharper focus on improving operational efficiencies to enhance profitability. This is likely to boost outsourcing of pharma activities in a major way to low-cost destinations like India and China.
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Pharmaceuticals Chart 13: Several blockbuster drugs going off patent over CY12-15 35
(USD bn)
28 21 14 7 0 CY10
CY11
CY12
CY13
Brand value
CY14
CY15
Blockbuster drugs Source: Edelweiss research
Project pipeline on the rise Global pharma companies across the spectrum are incrementally focusing on new product development to replace their existing blockbuster drugs. According to Pharma projects data, there are roughly 9,600 products in the pipeline from pre clinical through registration (up by 6% over FY10 and 14% since January 2009). Given the impending wave of branded products that are set to lose patent protection over the next few years, the focus of global pharma companies appears to be on later-stage clinical products, particularly at large pharma companies. Though pipeline expectations for discovery compounds at large pharma seems to be lower at this point, we expect them to reaccelerate as drug discovery is critical to the industry’s long-term success. Chart 14, below, indicates that pipeline compounds have improved, particularly in Phase II and III, over the past two years. While pre clinical and Phase I compounds have also grown, they have done so at a slower rate.
Over 9600 projects in pipeline from pre-clinical to Phase III stage
(No of drug candidates)
5,600 5,200 4,800 4,400
Phase I compounds
1,650 1,487 1,325 1,162
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
1,000
4,000
Jan-08
(No of drug candidates)
Chart 14: Pipeline compounds under various phases of development 1,812 6,000 Preclinical compounds
Source: Industry
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Edelweiss Securities Limited
Pharmaceuticals 753
Phase II compounds
491
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
425 Jan-09
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
May-09
Feb-09
Nov-08
Aug-08
May-08
Feb-08
1,304
556
Oct-08
1,509
622
Jul-08
1,714
687
Jan-08
1,918
Phase III compounds
Apr-08
2,123
(No of drug candidates)
(No of drug candidates)
2,328
Source: Industry
Outsourcing remains imperative The outsourcing trend has been further accentuated by a broader strategic mindset shift among pharma majors to focus on a few core strengths and look for competent partners for other activities. Impending large scale patent expiration and lack of sufficient new products to replace them is providing further impetus to global pharma players to step up outsourcing initiatives. Loss of exclusivity on patented products, dwindling R&D pipelines and bid to realign business models to new realities is imperative for global pharma majors to protect profitability.
Outsourcing penetration We strongly believe a combination of an expanding pipeline and shrinking internal resources will spur outsourcing. According to PharmSource, outsourcing penetration will increase across nearly all areas of development. The overall clinical development outsourcing market is likely to increase from USD13.8bn in CY11 to USD20.4bn in CY15, while the penetration rate is likely to surge from 23.3% in CY11 to 31.9% in CY15 (chart 20).
Chart 15: Outsourcing penetration to increase with improved macro outlook 35.0
21.2
28.0
15.9
21.0
10.6
14.0
5.3
7.0
(%)
(USD bn)
Outsourcing penetration to increase from 23% in CY11 to 32% by CY15
26.5
0.0
0.0 CY10
CY11
CY12
Clinical development
CY13
CY14
CY15
Penetration rate Source: William Blair, Parexel
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Edelweiss Securities Limited
Pharmaceuticals Asia is gaining more importance Asian countries are assuming more importance in the CRAMS space as the global economic balance is shifting from the West to the East. Solid infrastructure (highest number of FDA approved plants), vast skilled manpower, availability of treatment naïve patients and large pools of scientific manpower are key factors for global majors to take Asian countries more seriously. These factors not only reduce drug development costs, but also reduce the development time and, therefore, more time to market the products for global pharma players.
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Edelweiss Securities Limited
Pharmaceuticals
But, Valuations Yet To Catch Up CRAMS universe has jumped 15% since January 2012, post strong operating performance over the past three-four quarters. However, it is still trades at 40% discount to its May 2008 valuations. CRAMS universe, from 2007-2010, used to trade at par with BSE Healthcare Index, but 2010 onwards it started trading at a discount due to poor operating performance, over leveraged balance sheets and huge forex losses on account of adverse currency movement. With favourable macro environment, improved growth visibility and focus on deleveraging balance sheets, we expect the valuation gap between CRAMS universe and BSE Healthcare to narrow going forward.
30.0
1.4
24.0
1.1
18.0
0.8
12.0
0.6
6.0
0.3
0.0 Apr-06 Apr-07 CRAMS
(X)
(P/E one-year forward)
Chart 16: CRAMS valuations trading at a discount to BSE Healthcare Index
0.0 Apr-08
Apr-09 BSETHC
Apr-10
Apr-11 Apr-12 Relative premium (RHS)
Source: Bloomberg, Edelweiss research
Expect 28% earnings CAGR over FY12-14E We expect our CRAMS universe revenue to grow at 19.2% CAGR over FY12-14E, driven by 22% revenue growth in Divi’s and 16.4% revenue growth in Jubilant Life Sciences. Improved business mix and higher capacity utilization will lead to 120bps expansion in operating margins (21.9% EBIDTA growth), resulting 28% earnings CAGR over FY12-14E.
Table 2: CRAMS universe - key growth matrix (FY12-14 CAGR)
(%)
Revenue
EBIDTA
PAT
EPS
Jubilant
16.4
20.1
30.4
30.4
Divi's
22.0
23.7
26.1
26.1
CRAMS universe
19.2
21.9
28.2
28.2
Source: Edelweiss research
Initiate coverage with BUY on Divi’s and Jubilant Life Sciences We estimate revenue CAGR of 22% over FY12-14E for Divi’s, driven by a) 20% CAGR in CCS business and b) 20% CAGR in Carotenoids segment. We expect earnings CAGR of 26% over FY12-14E, resulting an EPS of INR50.6 to INR63.3 for FY13/14E, respectively. With best in class margins and return ratios, strong cash flows, improvement in working capital cycle and
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Pharmaceuticals strong growth visibility, we expect stock to trade in-line with front line pharma stock. We initiate coverage with ‘BUY’ rating and TP of INR1265. We expect JOL to report revenue and earnings CAGR of 16.4% and 30% over FY12-14E. We have adjusted our earnings net of R&D expenses being capitalized and our EPS works out to be INR20.2 and INR28.8 for FY13/14E respectively. With improved earnings visibility (30% earnings CAGR), focus on deleveraging balance sheet (expect DE to come down to 1x by FY14) and improved return ratios, we expect stock to trade in its long term one year forward average multiple of 10-11x. We initiate coverage with a ‘BUY’ rating and target price of INR290.
Table 3: Peer comparison Peer comparision valuation
Jubilant* Dishman Divi's CRAMS
Price INR 205 96 1,100
EPS (INR) FY13E FY14E 20.2 28.8 10.7 14.9 50.6 63.3
P/E (x) FY13E FY14E 10.2 7.1 9.0 6.5 21.8 17.4 13.6 10.3
EV/EBITDA (x) FY13E FY14E 6.0 4.7 5.9 4.9 17.0 13.8 11.5 9.4
ROAE (%) FY13E FY14E 15.5 18.3 8.8 11.1 28.3 28.7 18.6 19.9
Source: Edelweiss research *Note: Jubilant EPS is adjusted for R&D costs capitalised
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Pharmaceuticals
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INITIATING COVERAGE
Pharmaceuticals
DIVI’S LABORATORIES Good times to continue India Equity Research | Pharmaceuticals
Divi’s Laboratories (Divi’s) will be a key beneficiary of increased outsourcing opportunities driven by its expertise in complex chemistry, cost efficient processes and relationship with global pharma majors. Divi’s strategy to collaborate rather than compete and its India-centric business model has led to preferred and most efficient CRAMS players. We expect Divi’s revenue and earnings to post 22%/ 26% CAGR over FY12-14E, respectively. We initiate coverage with ‘BUY/ SP’ and TP of INR1265 (20x FY14E).
EDELWEISS 4D RATINGS Absolute Rating
BUY
Rating Relative to Sector
Performer
Risk Rating Relative to Sector
Medium
Sector Relative to Market
Underweight
MARKET DATA (R: DIVI.BO, B: DIVI IN)
Custom synthesis business: Superior play
CMP
: INR 1,100
Target Price
: INR 1,265
CCS business contributes nearly half of Divi’s top line and its profitability is superior than APIs and intermediate business. The company’s CRAMS business has grown from INR797mn in FY05 to INR8173mn in FY12 (39% CAGR), while EBIDTA margin has improved from 30.1% in FY05 to 41% in FY12. We expect this business to post 20% CAGR over FY12-14E driven by rich pipeline and strong customer relations.
52-week range (INR)
: 1,201 / 695
Share in issue (mn)
: 132,7
M cap (INR bn/USD mn)
: 145 / 2,816
Avg. Daily Vol.BSE/NSE(‘000) : 208.6 SHARE HOLDING PATTERN (%)
Generic API: Global leadership, new launches to drive growth
Current
Q4FY12
Q3FY12
Post 23% growth decline in FY10 due to inventory de-stocking, Divi’s generic business has staged a strong recovery and posted 41% CAGR over FY10-12, and accounts for nearly half of its turnover. A focused and intense product strategy differentiates the company from other generic API manufacturers. We believe upcoming patent cliff opportunity in US and new launches will drive 20% CAGR in generic business.
Promoters %
52.2
52.2
52.2
MF's, FI's & BK’s
17.2
17.3
17.3
FII's
10.2
9.6
10.2
others
20.4
20.9
20.8
Best-in-class margins and return ratios
RELATIVE PERFORMANCE (%)
What differentiate Divi’s from other players in the CRAMS space in India is its commitment to maintain profitability and capital efficiency. As a matter of fact, it is not only the most profitable company in the space, but also features among the most profitable companies in the Indian healthcare sector, with EBIDTA margin of 35-40%, backed by its strong chemistry skills and custom synthesis presence.
* Promoters pledged shares (% of share in issue)
:
Sensex
Stock
NIL
Stock over sensex
1 month
9.2
(4.9)
(14.1)
3 months
8.1
8.5
0.4
12 months
16.7
50.2
33.5
Outlook & valuations: At a premium; initiate with ‘BUY’ Stock is currently trading at 15% discount to its historical 5 yr average of 20x (one-year forward earnings). With best-in-class margins/return ratios, strong cash flows and higher growth visibility, we expect the stock to trade in line with frontline generics.
Financials Year to March Revenues (INR mn) EBITDA (INR mn) Adj. Diluted EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%)
FY11 13,165 5,009 32.4 25.7 34.0 28.1 25.9
FY12 18,640 6,994 39.7 22.7 27.7 20.2 27.6
Edelweiss Research is also available on www.edelresearch.com, 17 Bloomberg EDEL , Thomson First Call, Reuters and Factset.
FY13E 22,582 8,568 50.6 27.3 21.8 16.3 28.3
FY14E 27,658 10,568 63.3 25.3 17.4 13.0 28.7
Manoj Garg +91 22 6623 3302
[email protected]
Perin Ali +91 22 6620 3032
[email protected]
October 08, 2012 Edelweiss EdelweissSecurities SecuritiesLimited Limited
Pharmaceuticals
Investment Rationale Established pedigree to reap benefits of outsourcing boom Divi’s early mover advantage in CRAMS, strict adherence to IPR norms and strong relationship with pharma majors marked its transformation from an API player to a successful CRAMS player from India. By virtue of its long standing presence, the company has managed to establish itself in this segment, with CRAMS segment contribution surging from 22% in FY06 to 48% in FY12. It services 20 of the top 25 global companies and has become a prominent player in custom synthesis services from India. The company collaborates with innovator companies through the early drug development stage to the commercialisation stage.
Divi’s serves top 20 global innovator companies
We highlight that Divi’s will be one of the biggest beneficiaries of increased outsourcing plans of innovators, given its successful execution skills in the custom chemical synthesis (CCS) domain.
Custom synthesis business: Superior play The custom synthesis business contributes nearly half of Divi’s top line and has superior profitability than APIs and intermediate business. Custom synthesis involves process research and manufacture of new chemical entities where the service provider is involved with the innovator from the early stage of drug lifecycle. It provides them process and synthetic chemistry services such as process design for new drug candidates, process optimisation, product yield improvement, etc. These services entail significant cost savings for innovators. Besides, outsourcing these activities gives the innovator an opportunity to focus on core area of R&D and marketing. The scales of these products vary based on the stage of the drug ranging from grams/ kilograms to 100’s of kilograms. The lower the scale, the better the margin in general. Moreover, a manufacturer involved with a product from the early development stages is likely to remain the key supplier post approval as well.
Provides end-to-end service in custom synthesis Divi’s has four R&D centres and two pilot plants. Through these, it has strong presence in all stages of product development, starting from process development in labs to all stages of pre-clinical and clinical trials. The company also provides complete regulatory support, including DMF filings and large scale commercialisation of the product. Hence, innovator companies get the whole gamut of services under one umbrella. The company has developed significant capabilities in this space and has been able to provide services to the top 20 innovator companies over the past few years. These capabilities are evident from the fact that Divi’s has been able to maintain high growth and best-in-class EBIDTA and return ratios consistently. Its CRAMS business has grown from INR797mn in FY05 to INR8173mn in FY12 (39 % CAGR), while EBIDTA margin has improved from 30.1% in FY05 to 41% in FY12.
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Pharmaceuticals 53.0
7,974
47.2
6,140
41.4
4,305
35.6
2,471
29.8
(%)
(INR mn)
Chart 1: CCS revenue ramp-up and EBIDTA margins 9,808
637
24.0 FY05
FY06
FY07
Revenue
FY08
FY09
FY10
FY11
FY12
EBIDTA margins (%) Source: Company, Edelweiss research
Rich pipeline, strong customer relationship to fuel growth By virtue of long standing presence in the CRAMS space, strong chemistry skills and its collaborative approach, Divi’s has managed to establish strong relationships with many large global innovators. It generally collaborates with innovators at the NCE development stage and partners the innovator right up to the late life cycle management stage of the product. Post patent expiry, Divi’s also partner for APIs supply. We believe it is imperative for any CRAMS player to have presence across the value chain to become a preferred partner.
Divi’s presence across the value chain in CCS business makes it a preferred partner
In our view, CCS business has two advantages—first, entry barriers are relatively high as it takes years to build a relationship with clients. Second, the business is generally sticky in the sense that the manufacturer involved from the early stages of development is likely to remain a key supplier post commercialisation of the product. Divi’s has a sizable pipeline of custom synthesis products, though the company does not disclose the same due to confidentiality reasons. Of these, even if a few drugs reach the market, it would give the company a significant revenue opportunity. Moreover, commercial manufacturing contracts are generally long term, with high revenue visibility. In the past few years, growth in Divi’s CRAMS business has partly been driven by commercialisation of such projects (39% CAGR over FY05-12). Divi’s currently supplying API for 3 commercialised molecules. We expect this business to post 20% CAGR over FY12-14E.
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Edelweiss Securities Limited
Pharmaceuticals
(No of Product Addition)
Chart 2: Products addition in CCS segment 16 14 11 9 6 4 FY07
FY08
FY09
FY10
FY11
FY12 Source: Company
Generic API: Global leadership in key products; new launches to drive growth Divi’s generics business comprises manufacture and supply of APIs and key intermediates of drugs that are already generic in most global markets. The company exports > 80% of its products and sells a small portion to domestic pharma companies. Divi’s has 36 US DMF filings and 13 European CoS (certificate of suitability) filings. Post 23% decline in FY10 due to inventory de-stocking, the company’s generic business has shown strong recovery and grew 41% CAGR over FY10-12 and accounts for nearly half of its turnover.
10,965
62.0
9,202
44.2
7,439
26.4
5,675
8.6
3,912
(9.2)
(%)
(INR mn)
Chart 3: Generic revenue posted at 41% CAGR over FY10-12
2,149
(27.0) FY06
FY07
FY08
FY09
Revenue
FY10
FY11
FY12
Growth (%) Source: Company, Edelweiss research
Focused product strategy to attain global leadership A focused and intense product strategy differentiates Divi’s from other generic API manufacturers. The company selects products with complex chemistry, develops proprietary, efficient processes to manufacture them and tries to capture a large share of the global market for products (more than 70% of market share) where it can control pricing to a great extent. This is evident from the fact that top 3 APIs such as Naproxen (18-19% of Divi’s 20
Edelweiss Securities Limited
Pharmaceuticals overall revenue), Dextromethorphan (8-9% of revenue) and Nabumetone (2-3% of revenue) contribute ~30% to Divi’s overall revenue and enjoy significant market share (over 70%). These three products highlight the company’s focused strategy in identifying, developing, manufacturing and marketing of products. Further, as these products are present in the market since long, we believe they are unlikely to face much price erosion and will remain cash cows for an extended period.
Table 1: Key generic products Product name Naproxen Dextromethorphan Nabumetone Levodopa Phenylephrine
Therapeutic area Osteoarthritis Cold and cough Osteoarthritis CNS Cold and cough
Indication Pain Cough Pain Parkinson disease Cough
Global market (USD mn) 377 249 67 79 26
Source: Company, Edelweiss research
The high global market share gives significant pricing power to Divi’s. Further, the company continues with process R&D in the manufacture of these products, continuously reducing manufacturing costs, and maintaining cost leadership, which helps it sustain market share and profitability.
A focused and intense product strategy differentiates the company from other generic players
Divi’s follows a rigrous criteria to take up any new product which includes: •
Complex chemistry that will limit global competition.
•
Scope for process improvemnet.
•
Scope for large market share in large global market.
New launches to drive growth Upcoming patent cliff in the US and recent genericisation of products like Quitapine and Valsartan augur well for Divi’s API busimess over the long term. With a portfolio of 36 products in its bag (25 more products are under development), the revenue scale up to INR9bn (~INR250mn per product) is immpresive, reflecting the company’s astute product selection process. Further, the company is awaiting USFDA approval for over 10 products which has market potential of USD8-9bn (innovator market size). Moreover, it has a strong development portfolio with a market potential of over USD10-12bn. Divi’s recent launces such as Levitracetam (over 75% market share), Gabapentin (quickly ramping up market share), Levodopa and Carbidopa have witnessed strong traction and enthuse us with confidence that new launches will drive future growth. We expect this business to post 20% CAGR over FY12-14E.
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Edelweiss Securities Limited
Pharmaceuticals Table 2: New additions will drive growth Brand Seroquel Diovan Nisapan Xeloda Micardis Benicar Lyrica
Divi’s is awaiting approvals for over 10 products, having a market potential of over USD8bn-9bn
Generic Quetiapine Valsartan Niacin Capecitabine Telmisartan Olmesartan Pregabalin
Market size Patent (USD bn) expiry date 3,107 Expired 2,520 Expired 927 Sep'13 545 Dec'13 298 Jan'14 1,337 Oct'16 1,424 Dec'18
Indication CNS CVS Cholestrol Oncology CVS CVS CNS
Source: Company, Edelweiss research
Further, the company adds capaciities for manufacture only after obtaining clear visibility of orders for products. Hence, it hardly has any idle capacity. These factors engender sustainable profitability and capital efficiency.
Table 3: Products under development Product Name Therapeutics Aliskirin Hemifumarate CVS Atazanavir CNS Atorvastatin CVS Bazodoxifene RA Chlophedianol HCL CNS Fesoterodine CNS Fondaparinex CVS Saxagliptin Diabetes Valgaciclovir Anti-Viral
Indication Cholestrol HIV Cholestrol Post Menopausal Osteoporosis Cough Supressant Anti-Diuretic Anti-Cogulant Anti-Diabetic Anti-Viral
Global sales (USD mn) 557 1400 10000 Yet to get approval in US 275 140 550 600 575 Source: Company, Edelweiss research
Chart 4: New product addition in generic segment
No of product additions
9
7
5
4
2
0 FY07
FY08
FY09
FY10
FY11
FY12
Source: Company, Edelweiss research
Carotenoids: Building blocks for future growth Nutraceuticals ingredients are a relatively new segment and Divi’s is targeting carotenoids as an additional growth driver in the coming years. It is targetting the global synthetic 22
Edelweiss Securities Limited
Pharmaceuticals carotenoids market by tying up with feed manufacturers. The global carotenoids marketincluding food, feed and pharmaceuticals is estimated at about USD1bn. EU accounts for almost half of this market and the US accounts for about 20%. Feed will continue to dominate carotenoids’ demand for the next few years. This business has high entry barriers because of complexities in manufacturing. Divi’s has so far been a marginal player in the global carotenoids market with less than 2% market share. Although the company entered this segment four years ago and enjoys a significant cost advantage, ramp up has been slower than expected owing to the need for certication from separate regulatory agencies across end user markets.
Chart 5: Carotenoids market break-up Beta-carotene 22%
Others 28%
Lycopene 5% Canthaxanthin 7%
Lutein 19%
Astaxanthin 19% Source: Industry
Moreover, as the market is largely dominated by two well entriched players—DSM and BASF (over 55% market share)—penetration has been rather difficult for new players like Divi’s with a limited portfolio. However, with gradual increase in portfolio size (from 6 products in FY09 to 10 in FY12), its strategy to build customer specific products and most regulatory approvals in place, we believe the company is now well placed in this market. What we believe will shift the pendulum for new players like Divi’s is: (a) significant price hike of select products owing to supply-side constraints from existing manufacturers; and (b) gradual shift in focus from synthetic to natural carotenoids (3-4x expensive) of major players like DSM and BASF (recent acquistions DSM-Vitatene, LycoRed-Vitan and BASF-Cognis have all been in naural carotenoid space) due to intense competition from cheaper Chinese and Indian suppliers, lead us to believe that the ramp up is likely to be faster.
Company expects carotenoids business to grow 40%-50% CAGR over next 2-3 years
Table 4: Recent price hikes in Carotenoids market Hike initiated by Period Price hike Carotenoids BASF April'11 12% Canthaxanthin, Citranaxanthin, C30ester, Beta-carotene Across the board April'11 ~100% Lutein DSM Nov'11 20% Beta-Carotene DSM May'12 7% Carophyll Source: Industry
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Edelweiss Securities Limited
Pharmaceuticals Management has given guidance of growing this business at 40-50% CAGR (albeit on a low base) over the next 2-3 years and we believe that growth drivers are in place.
Best-in-class margin and return ratio What differentiates Divi’s from other players in the CRAMS space in India is its commitment to maintain profitability and capital efficiency. As a matter of fact, Divi’s is not only the most profitable company in the CRAMS space, but also features among the most profitable companies in the Indian healthcare sector with EBIDTA margin of 35-40% backed by its strong chemistry skills and custom synthesis presence. We highlight that the company does not chase top line growth at the cost of margin and does not make capital investments that do not yield the desired returns. The high margin and return ratio are maintained by: a)
Developing products that involve complex chemistry and keeps competition away and therefore help the company dominate the market with significant pricing power.
b)
Increasing contribution from high margin CCS business.
c)
Avoid commoditised products just to fill capacity.
d)
Avoid capex until clear visibility emerges on client orders.
e)
Tight control over the quantum of capex.
f)
Swift execution of projects and quick capacity ramp up.
Table 5: Best in class profitability Coverage Universe Divi's Jubilant Lifesciences Dishman Shasun Pharma Cadila Aurobindo Cipla Dr. Reddy's Glenmark Ipca Lupin Sunpharma Ranbaxy Torrent Pharma
Divi’s is among the most profitable companies in the Indian healthcare sector
ROE(%) 27.6 15.0 6.3 14.0 30.2 17.6 15.4 28.0 22.6 24.1 25.5 23.9 29.8 33.1
FY12 ROCE(%) 41.6 11.0 8.9 8.8 23.9 7.9 19.6 30.4 16.2 19.1 26.9 46.0 25.0 42.9
EBITDA margin(%) 37.0 19.9 19.8 8.6 20.8 12.0 23.3 24.9 19.8 21.8 20.8 40.7 16.0 19.3
Source: Company, Edelweiss research
All the above factors lead to best-in-class margins and return ratios for the company and in turn high free cash flow.
Strong capex imparts visibility to future growth Divi’s has undertaken a capex of INR2bn (spread over FY11-12), to add 30% capacity at its DSN SEZ in Vizag. Past track record indicates that the company generally does not undertake large capex without visibility on customer contracts. Given the limited information shared 24
Edelweiss Securities Limited
Pharmaceuticals by management on such contracts (due to confidentiality reasons), we track capex as a lead indicator of future growth for Divi’s. The company commisioned two blocks (June 2011) at the second unit of SEZ which contributed INR1.3bn, or 7%, to FY12 sales, implying an asset/turnover ratio of 0.65x within nine months of commisioning. It is in the process of commissioning the balance three blocks (likely by H2FY13). Assuming a A/T of 1.5x (in line with historical average), the SEZ can incrementaly contribute INR4.5bn over the next two years.
Divi’s does not undertake large capex without visibility on revenue
3,000
1.4
2,400
1.1
1,800
0.8
1,200
0.6
600
0.3
(X)
(INR mn)
Chart 6: Sharp improvement in free cash flow
0
0.0 FY08
FY09
Free cashflow
FY10
FY11 Capex
FY12
FY13E
FY14E
Asset turnover ratio Source: Company, Edelweiss research
20% growth guidance reflects management confidence Management has guided for 20% revenue CAGR over FY12-14, while retaining EBIDTA margin at the current level of 37-38%. We believe the strong guidance is partly based on management’s expectation of revenue contribution from the new SEZ and ramp up in carotenoids sales. We estimate top line CAGR of 22% for FY12-14 and average EBIDTA margin of 38% in this period, led by 20% revenue CAGR in the CCS business and 58% CAGR in carotenoids segment.
Currency depreciation to have positive impact on Divi’s Divi’s generate ~89% of revenue from exports, out of which, 73% of revenue is dominated in USD. Though 40-45% of its long term contracts are fixed contracts (currency benefits passed through to the customers) and 20% of its operating cost is dollar denominated, it retains the benefits of balance 23% of the revenue. As per our calculations, for every 10% depriciation in rupee versus USD, Divi’s will have positive impact of 2.3% and 5.5% on revenue and EBIDTA respectively.
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Edelweiss Securities Limited
Pharmaceuticals Table 6: Currency sensitivity Forex exposure (USD) Exports as % of sales % of overall sales exposed to USD INR movement Dollar exposure Pounds exposure Euro exposure Operating expenses (% of sales) Fixed contracts (% of overall sales) & of sales sensitive to currency 10% movement in USD/INR Impact on revenue (%) Impact on EBIDTA (%)
10% rupee depreciation will have 5.5% positive impact on profitability
(%) 89.0 73.0 82.0 14.0 4.0 20.0 30.0 23.0 2.3 5.5 Source: Company, Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Valuation We remain positive on the prospects of pharma outsourcing from India, given the unique combination of low-cost and chemistry skills that India offers. We expect Divi’s to be a key beneficiary of the increased outsourcing from India given its strong relationships with global innovator pharmaceutical companies. With best-in-class margins and return ratios, strong cash flows, improvement in working capital cycle and strong growth visibility, we expect the stock to trade in line with frontline pharma stocks.
Premium valuations to sustain At CMP of INR1100 the stock trades at 21.7x and 17.3x FY13 and FY14 core earnings, which is at a premium to peer CRAMS players, however 15% discount to its historical five years average. With best in class margins and return ratios, strong cash flows, improvement in working capital cycle and strong growth visibility, we expect stock to trade in-line with frontline pharma stock. We initiate our coverage with ‘BUY/SP’ rating and target price of INR1265 (20x FY14).
Chart 7: Stock is trading 15% discount to its historical five years average (20x) 1,500 23x 1,200 20x 17x 14x
(INR)
900 600 300
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
0
Source: Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Key Risks Higher dependency on top three products, top five clients Nearly 30% of Divi’s revenue comes from its top 3 products. Similarly, top 5 clients contribute a disproportionally large 47% to overall business. However, these numbers are steadily dipping as the company is consciously looking to increase its customer base and selectively expanding its product basket.
Project delays/failures at customer end Project deferral and product failures at customer’s end could impact growth in CCS business (48% of overall revenue).
Regulatory risks Most of Divi’s revenue comes from regulated markets. Any manufacturing issue/ regulatory issue can have adverse impact on our estimates.
Currency risks Almost 89% of Divi’s revenue comes from exports. Rupee appreciation can have adverse impact on earnings.
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Edelweiss Securities Limited
Pharmaceuticals
Company Description Divi’s Laboratories is well-positioned in the US$45 billion global contract manufacturing market as a research focused, contract manufacturing player. Divi’s revenues are derived from development (custom synthesis) and contract manufacturing (custom manufacturing) of APIs / intermediates for innovator companies, while the balance is derived from generic exports where it derives strong economies of scale and competes globally. It is the largest manufacturer of peptide reagents and protected amino acids worldwide. The company is leader in some of its products in the API business such as Naproxen Sodium (an antiinflammatory drug) and Dextromethorphan (a cough suppressant). Divi’s has an unassailable track record with presence in the entire lifecycle of a pharmaceutical product. This makes it the preferred one-stop solution provider for pharma giants. Divi’s boasts of working with 20 of the top 25 global pharma companies, with over 100 projects in the pipeline. Recently, it has entered into the lucrative carotenoid segment, which will help diversify its API product mix.
Chart 8: Revenue break-up (major segments)
Carotenoids Peptides 4% 3%
Generics 49%
Custom synthesis 44%
Source: Company, Edelweiss research
The company operates predominately in the export market, which accounts for nearly 89% of its overall revenue with ~71% of it coming from developed markets like the US and EU.
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Edelweiss Securities Limited
Pharmaceuticals Chart 9: Revenue break-up (Geographical) RoW 18%
Europe 28%
India 11%
Americas 43% Source: Company, Edelweiss research
Chart 10: Shareholding pattern Others 21%
DII 1%
Promoter 49%
FII 29%
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Financial Outlook Expect 22% revenue CAGR over FY12-14E We estimate revenue CAGR of 22% over FY12-14E, driven by: (a) 20% CAGR in CCS business, b) 20% CAGR in generics and c) 55% CAGR in Carotenoids segment. We expect Divi’s to be a key beneficiary of the increased outsourcing from India given its strong relationships with global innovator pharmaceutical companies, while new launches in the API segment will drive growth for the generic businrss. In the Carotenoids segment, though the ramp-up so far has been slower than expectations, however, with gradual increase in portfolio size (from 6 products in FY09 to 10 in FY12) and most regulatory approvals in place, we believe the company is now well placed in this market.
Table 7: Revenue progress over FY12-14E DIVIS Carotenoids Peptides Custom synthesis Generics Total
FY11 620 392 6,013 6,046 13,071
FY12 820 520 8,173 9,137 18,650
FY13E 1,292 692 9,813 10,841 22,638
FY14E 1,960 899 11,749 13,132 27,739
(INR mn) CAGR FY12-14E(%) 54.6 31.5 19.9 19.9 22.0
Source: Company; Edelweiss research
Expect 120bps expansion in margins over FY12-14E With focus on complex chemistry, cost efficient process and its ability to quickly ramp-up the capacity utilization, Divi’s enjoys the best in class operating margins. We expect EBIDTA margin to improve 120bps over, driven by a) improved traction in high margins CCS business, b) ramp-up in the capacity utilisation and c) incremental contribution from Carotenoids business.
7,844
48.2
6,729
43.4
5,615
38.6
4,500
33.8
(%)
(INR mn)
Chart 11: Capacity ramp-up and higher CCS contribution will improve profitability 8,958 53.0
3,386
29.0 FY10
FY11
Operating profit
FY12
FY13
FY14
Operating margins Source: Company; Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals Expect 26% earnings CAGR over FY12-14E We expect earnings CAGR of 26% over FY12-14E, driven by strong revenue growth and improved operating performance. The EPS works out to be INR50.6and INR63.3 for FY13 and FY14E respectively. Owing to improved profitability and higher assets turnover ratio, the RoE will improve from 27.6% in FY12 to 28.7% in FY14E.
44.0
5,605
39.6
4,884
35.2
4,164
30.8
3,443
26.4
(%)
INR mn)
Chart 12: PAT margins to improve 6,326
2,722
22.0 FY10
FY11
FY12 PAT
FY13E
FY14E
PAT margins Source: Company; Edelweiss research
Strong free cash flow generation With major capex behind us and improvement in working capital cycle, we expect Divi’s to generate strong free cash flow of INR6bn over FY12-14E. With improving profitability and capacity utilisation, we expect RoCE to improve from 41.6% in FY12 to 43.6% in FY14.
Chart 13: Strong returns ratio 50.0 40.0
(%)
30.0 20.0 10.0 0.0 FY11
FY12 ROCE
FY13E
FY14E
ROE Source: Company; Edelweiss research
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Pharmaceuticals
Financial Statements Key assumptions Macro -
GDP (Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector CMO growth (Y-o-Y %) Company - CCS growth (Y-o-Y %) New products introduction (CCS) Generic growth (%) New products introduction (Generic) Carotenoids growth (%) USD/INR (Avg)
FY11 8.4 9.9 6.75 45.6 15.0 30.0 13.0 44.0 8.0 58.0 45.6
FY12 6.5 8.8 8.50 47.9 15.0 36.0 5.0 51.0 3.0 32.0 47.9
FY13E 5.8 7.8 7.50 53.5 15.0 20.0 5.0 19.0 5.0 58.0 52.0
FY14E 6.5 6.0 6.75 52.0 15.0 20.0 7.0 21.0 5.0 52.0 51.0
Note: Currency sensitivity: Every 10% rupee depreciation will have positive impact of 5.5% on EBITDA
Income statement Year to March Net revenues Other operating income Total operating expenses Materials cost Employee cost Selling, admin and general expenses EBITDA Depreciation and amortisation EBIT Net Interest expense/(income) Other income Profit before tax (excl extraordinaries) Provision for tax Core profit Reported Profit after Minority Interest Adjusted Profit After Tax EPS (INR) adjusted Dividend payout (%)
FY11 13,071 94 8,156 6,200 857 950 5,009 534 4,475 22 271 4,724 431 4,293 4,293 4,293 32.4 30.9
FY12 18,488 152 11,646 8,795 1,509 1,154 6,994 621 6,373 37 560 6,896 1,474 5,423 5,333 5,271 39.7 32.7
FY13E 22,423 159 14,014 10,584 1,839 1,368 8,568 700 7,868 40 665 8,493 1,784 6,710 6,710 6,710 50.6 25.7
(INR mn) FY14E 27,476 182 17,090 12,914 2,226 1,676 10,568 773 9,795 43 887 10,639 2,234 8,405 8,405 8,405 63.3 20.5
Common size metrics- as % of net revenues Year to March Cost of revenues Employee cost Total operating expenses Depreciation and Amortisation EBITDA margins Net profit margins
FY11 47.1 6.5 62.0 4.1 38.0 32.8
FY12 47.2 8.1 62.5 3.3 37.5 29.3
FY13E 46.9 8.1 62.1 3.1 37.9 29.9
FY14E 46.7 8.0 61.8 2.8 38.2 30.6
Growth metrics (%) Year to March Revenues EBITDA Net profit Adj. EPS
FY11 38.6 21.1 26.1 25.7
FY12 41.6 39.6 26.3 22.7
FY13E 21.1 22.5 23.7 27.3
FY14E 22.5 23.3 25.3 25.3
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Edelweiss Securities Limited
Pharmaceuticals Balance Sheet As on 31st March Share capital Revenue and surplus Shareholder fund Long term borrowings Short term borrowings Loan funds Deferred tax liability/asset Sources of funds Tangible assets CWIP (incl. intangible) Total net fixed assets Current investments Cash and cash equivalents Inventories Sundry debtors Loans & advances Other assets Total current assets (ex cash) Trade payable Other current liabilities and provisions Total current liabilities & provisions Net current assets (ex cash) Application of funds
FY11 265 17,710 17,975 49 136 185 500 18,661 5,899 1,043 6,943 5,256 177 5,717 3,652 951 51 10,372 1,230 2,857 4,087 6,285 18,661
FY12 265 21,050 21,315 26 529 554 609 22,479 7,384 1,820 9,204 4,770 309 6,790 4,956 1,469 68 13,283 1,595 3,493 5,088 8,195 22,479
FY13E 265 25,792 26,057 26 529 554 609 27,221 10,504 10,504 5,270 1,220 8,171 5,959 2,018 68 16,216 1,904 4,085 5,990 10,226 27,221
(INR mn) FY14E 265 32,178 32,443 26 529 554 609 33,607 11,731 11,731 7,270 2,089 10,012 7,302 2,473 68 19,855 2,334 5,006 7,339 12,515 33,607
Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow
FY11 4,293 534 45 4,872 1,062 3,810 1,341 2,469
FY12 5,333 621 45 5,999 1,865 4,134 2,882 1,251
FY13E 6,710 700 7,410 2,032 5,378 2,000 3,378
(INR mn) FY14E 8,405 773 9,178 2,289 6,889 2,000 4,889
Cash flow metrices Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid
FY11 3,810 (1,568) (2,184) 58 (1,341) (1,541)
FY12 4,134 (1,564) (2,396) 174 (2,882) (2,006)
FY13E 5,378 (1,968) (2,500) 910 (2,000) (2,019)
FY14E 6,889 (2,019) (4,000) 870 (2,000) (2,019)
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Pharmaceuticals Profitability and liquidity ratios Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity
FY11 25.9 36.3 315 82 83 314 2.5 0.0 0.0 0.0
Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover
FY12 27.6 41.6 260 84 59 285 2.6 0.1 0.0 0.0
FY11 0.8 2.2 0.8
Valuation parameters Year to March Adjusted EPS (INR) EPS YoY growth (%) CEPS (INR) Diluted PE (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%)
FY13E 28.3 41.3 258 88 60 286 2.7 0.1 0.0 0.0
FY12 0.9 2.8 0.9
FY11 32.4 25.7 36.4 34.0 7.8 10.7 28.1 0.9
FY12 39.7 22.7 45.5 27.7 6.5 7.6 20.2 1.2
FY14E 28.7 43.6 257 88 60 285 2.7 0.1 0.0 0.0
FY13E 0.9 2.5 0.9
FY13E 50.6 27.3 55.8 21.8 5.4 6.2 16.3 1.2
FY14E 0.9 2.5 0.9
FY14E 63.3 25.3 69.1 17.4 4.3 5.0 13.0 1.2
Peer comparision valuation
Jubilant* Dishman Divi's CRAMS
Price INR 205 96 1,100
EPS (INR) FY13E FY14E 20.2 28.8 10.7 14.9 50.6 63.3
P/E (x) FY13E FY14E 10.2 7.1 9.0 6.5 21.8 17.4 13.6 10.3
EV/EBITDA (x) FY13E FY14E 6.0 4.7 5.9 4.9 17.0 13.8 11.5 9.4
ROAE (%) FY13E FY14E 15.5 18.3 8.8 11.1 28.3 28.7 18.6 19.9
Source: Edelweiss research *Note: Jubilant EPS is adjusted for R&D costs capitalised
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Pharmaceuticals
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INITIATING COVERAGE
Pharmaceuticals
JUBILANT LIFE SCIENCES Back on track India Equity Research | Pharmaceuticals
Jubilant Life’s (JOL) recent performance highlights the improvement in core business. Capacity ramp up, new orders coupled with improved realisation have enhanced the earnings visibility over the next two years. We expect JOL to report 30% earnings CAGR over FY12-14E, driven by (a) 16.5% revenue CAGR and (b) 130 bps margin expansion. With improved earnings visibility and focus on balance sheet, we expect the stock to trade in its long term average of 10-11x. We have set a 12-m PE base target price of INR290 (10x FY14E; 40% upside potential).
EDELWEISS 4D RATINGS Absolute Rating
BUY
Rating Relative to Sector
Performer
Risk Rating Relative to Sector
Medium
Sector Relative to Market
Underweight
MARKET DATA (R: JUBO.BO, B: JOLI IN) CMP
: INR 205
Well placed to capture growth opportunities across segments
Target Price
: INR 290
52-week range (INR)
: 226 / 154
JOL has multiple growth drivers both in pharmaceuticals as well as life science ingredients (LSI) segment. In pharmaceuticals, CMO of injectibles, generic formulations, radiopharmaceutical along with API will drive growth while LSI segment will ride capacity ramp up of Vitamin B3 (Niacinamide) and Symtet.
Share in issue (mn)
: 159.3
M cap (INR bn/USD mn)
: 34 / 656
Avg. Daily Vol.BSE/NSE(‘000) : 124.3 SHARE HOLDING PATTERN (%)
Moving up value chain in life science Ingredients
Current Q4FY12
In the LSI segment, where JOL has attained leadership in Pyridine and its derivatives, the company is moving up the value chain by entering into value add products such as Symtet and Niacinamide. The company has invested ~USD90-100mn in these two facilities which at peak can generate USD150-160mn revenue.
Promoters %
49.0
Q3FY12
49.0
49.0
MF's, FI's & BK’s
8.8
1.5
1.4
FII's
21.5
28.5
28.4
others
20.6
21.0
21.2
* Promoters pledged shares (% of share in issue)
:
2.0
Capex cycle peaks out; focus to improve DE, ROCE With the investment cycle behind us (USD3.5bn capex in FY13), JOL’ incremental focus will be on improving productivity and prune debt via internal accruals (INR11bn over the next three years). The company’s focus will be to cut DE to 1x (DE at 1.5x in FY12) and improve RoCE from the current 11.0% to 15% in FY14E.
Outlook and valuations: Positive; initiate coverage with ‘BUY’
RELATIVE PERFORMANCE (%) Sensex
Stock
Stock over sensex
1 month
9.2
(4.2)
(13.4)
3 months
8.1
20.6
12.5
12 months
16.7
15.5
(1.1)
We expect JOL to report revenue and earnings CAGR of 16.5% and 30% over FY12-14E. With improved earnings visibility (30% earnings CAGR), focus on deleveraging balance sheet (expect DE to come down to 1x by FY14) and improved return ratios, we expect stock to trade in its long term one year forward average multiple of 10-11x. At CMP of INR 205, the stock is trading at 7.1x FY14 EPS of INR28.8.
Financials Year to March Revenues (INR mn) EBITDA (INR mn) Adjusted net profit (INR mn) Adj. Diluted EPS (INR) P/E (x) EV/EBITDA (x) ROAE (%)
FY11 34,420 5,536 2,706 13.5 15.2 11.2 12.4
FY12 42,782 8,485 3,384 16.9 12.1 8.1 15.0
Edelweiss Research is also available on www.edelresearch.com, 37 First Call, Reuters and Factset. Bloomberg EDEL , Thomson
FY13E 49,896 10,223 3,887 20.2 10.2 6.6 15.5
FY14E 58,231 12,246 5,331 28.8 7.1 5.2 18.3
Manoj Garg +91 22 6623 3302
[email protected]
Perin Ali +91 22 6620 3032
[email protected]
October 08, 2012 Edelweiss Securities Limited Edelweiss Securities Limited
Pharmaceuticals
Investment Rationale Successful transformation with increased focus on pharmaceuticals JOL has successfully made the transition from being a chemical manufacturer to an integrated solution provider in pharmaceutical (51% of revenue) and Life Science Ingredients (LSI) segment (49% of revenue). Within pharma, the company’s interest spans across product and service verticals while in LSI division, proprietary products and vitamins are the key contributors. The company has leadership in Pyridine, that formed the basis of its forward integration and today it has emerged as one of the largest CRAMS players in India. JOL is one among the top five CMO injectibles players in North America with an endto-end service platform in drug discovery services. Within the product segment, the company has specialty portfolio of radiopharmaceutical products and an impressive pipeline of generic formulations and APIs in regulated markets.
JOL has transformed itself from being a chemical manufacturer to an integrated solution provider
Fig. 1: Jubilant- Key business verticals
Jubilant Life Science
Pharmaceuticals (51%)
Life Science Ingredients (49%)
Proprietary Products & Exclusive Synthesis (22%) Products
Services Nutrition Ingredients (5%)
Active Pharma Ingredients (10%)
Contract Manufacturing Outsourcing (15%)
Generics (13%)
Drug Discovery & Development (6%)
Specialty Pharma (7%)
Healthcare (0.3%)
Life Science Chemicals (22%)
Source: Company, Edelweiss research
Well placed to capture growth opportunities across segments The company has multiple growth drivers both in pharmaceuticals (17% CAGR over FY1214E) and LSI (16% CAGR over FY12-14E) segments. In pharmaceuticals segment, Injectibles CMO (contract manufacturing) and radiopharmaceutical vertical along with generics and API will drive growth. Within LSI segment, we expect capacity ramp up of Vitamin B3 and Symtet to drive growth. We are outlining below growth drivers within key verticals.
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Edelweiss Securities Limited
Pharmaceuticals Injectibles CMO: New order wins to drive growth JOL has entered the CMO segment primarily through acquisition of Holister (June 2007; USD122mn) and Draxis (April 2008; USD255mn). These acquisitions positioned the company as a strong player in the injectibles CMO space, one among the top five injectibles contract manufacturers in North America. As JOL primarily services innovators (including 6 out of top 10 pharma majors), proximity to the customer has distinct advantage. In FY12, this segment contributed 15% to overall revenue with 17% growth.
New orders will ramp up capacity utilisation
Chart 1: CMO injectibles is critical driver of future growth API 10% Generics 13% Life sciences 49%
Radio pharma 4% Allergenic extracts 3%
Healthcare 0%
Contract manufacturing 15%
DDDS 6%
Source: Company, Edelweiss research
The company intends to expand its customer base via aggressive business development efforts and has inked multiple new long-term contracts (USD160mn) which will drive growth going forward. These new contracts are likely to add USD30-35mn annually FY13 onwards. We, thus, expect CMO business to post 22% CAGR over FY12-14E, driven by higher capacity utilisation (80-85% by FY14E from c65% in FY12) through these new contracts.
Table 1: Large contracts signed over past two years add higher growth visibility
Incremental orders I II
Total value (USD mn) 70 90
Duration of contract 4 5
Signed during period 2011 2012
Supplies to start from period Q2FY12 Q2FY13
Source: Company, Edelweiss research
Generic growth to be aided by new launches in US Generic formulation business in US was the key growth driver during FY12 with 161% YoY growth, contributing 13% to overall revenue (chart 2). Robust revenue growth was driven by price hike in Methyl-Prednisolone (12x; USD50mn revenue in FY12) and a couple of new launches. JOL took a price hike in Methylprednisolone from USD1 per pack to USD12 per pack as one of the suppliers (Par Pharma) exited the market in Q2FY12. However, post resumption of supply from the affected player, prices have settled at USD8-9 per pack since the past two quarters (prices are holding up due to limited competition, we expect gradual reduction in the price of this product).
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Edelweiss Securities Limited
Pharmaceuticals Moreover, despite being a late entrant JOL has been able to capture decent market share (over 20% in 8 out of 12 ANDAs; top 3 player in 6 products) because of its vertical integration and cost competitiveness.
Chart 2: Jubilant gains sizeable market share in products Terazosin Prednisone Oxcarbazepine Methyl-prednisolone Meclizine PCP Lamotrigine HCT Z Caps Donepezil Cyclobenzaprine Alendronate 0.0
13.2
26.4
39.6
52.8
66.0
(%) Source: Company, Edelweiss research
JOL has 29 pending approvals in US and it expects a large number of approvals to drive its generics exports over the next three years. Thus, with robust pipeline (over 100 launches across geographies) and expansion in other markets of EU and Japan, we expect 17% CAGR growth within generics over FY12-14E.
Table 2: Key API filings within the US Brand Generic name Hyzaar Losartan Avalide/ Avapro Irbesartan Atancand Candesartan Diovan Valsartan Zometa Zoledronic Acid Aciphex Rabeprazole Micardis Telmisartan Nexium Esomeprazole Teveten Esprosartan Actonel Risedronate Abilify Aripiprazole Vesicare Solifenacin Benicar Olmesartan
Innovator MSD Sanofi Astrazeneca Novartis Novartis Eisai BI Astrazeneca Abott Warner Chilcott Otsuka Astellas Daiichi- Sankyo
Market size (USD mn) 1,600 500/1,200 255 1,650 775 1,230 298 6,300 100 1,100 1,733 1,000 1,337
TA CVS CVS CVS CVS CVS GI GI CVS Osteoporosis CNS CNS CVS
Patent expiry Expired Expired 2012 Sep'12 Sep'12 June'13 Jan'14 May'14 June'14 June'14 Apr'15 Dec'15 Oct'16
Source: Company; Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals Radiopharmaceuticals: Expansion, new launches to drive growth JOL has attained a unique position in the nuclear medicine market with leadership position in products like I-131 (used in treatment of thyroid cancer), MAA (macro aggregates of Albumin; used in lung imaging) and DTPA (Diethylene Triamine Penta Aceticacid suitable for lung and renal imaging). This segment contributed 4% to revenue with 25% growth in FY12.
Rubifill launch in US/ Canada to drive growth in Radio pharmaceutical business
The global market for radiopharmaceutical products is likely to rise from USD3bn in 2010 to USD5bn by 2015E. This market is likely to have limited number of players as it requires different skill sets. JOL is looking to launch Rubi-fill in US and Canada in FY13 (USD60mn market opportunity), where it will have the first mover advantage in Canada and it will be one among the two players in the US. We expect this business to post 20% CAGR over FY1214E driven by: (a) new launches in US and Canada; and (b) entry in emerging markets including India.
Table 3: Radio pharma pipeline Products Rubyfill Magnevist Molyfill
Launch date 2012 2013 2015
Market size (USD mn) 60 35 35 Source: Edelweiss research
LSI: Integrated business model offers cost competitiveness Extracting Pyridine through green routes offers significant cost advantage
JOL' global scale capacities in Acetyl and Pyridine build a high degree of integration into its business enabling it to offer services across the value chain. Vertical integration and scale allow it to be cost competitive and gain market share in various segments. The company is one of the largest players in acetyls in India, a raw material used for production of Pyridines. In Pyridine, JOL has emerged as the largest player in the world with extensive chemistry skills and a large basket of Pyridine derivatives, providing more than 150 products for use in 229 APIs and 17 agrochemicals. Extracting the chemicals from molasses is more costeffective compared to hydro carbon used by competitors, thus offering JOL better margin and competitive advantage.
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Edelweiss Securities Limited
Pharmaceuticals Fig. 2: Vertical integration offers cost advantage
Ethyl Acetate COMMERCIAL PRODUCTS NON COMMERCIAL PRODUCTS
Vinly Acetate Monomer Monochloro Acetic Acid
Sugarcane
1
Molasses
Alcohol
5
6
Acetic Anhydride 4 Acetic Acid 3 Acetal 2 dehyde
from sugarmill
Inhouse Distillery
Sugar
Source: Company; Edelweiss research
In an effort to move up the value chain, the company has set up manufacturing facilities of higher value added products such as Vitamin B3 and Symtet and emerged as one of the largest players in these segments.
Moving up value chain aids growth and profit visibility In the LSI business, where JOL has attained leadership in Pyridine and its derivatives, the company is moving up the value chain by entering to higher value added products such as Symtet and Vitamin B3. For Vitamin B3, JOL will be vertically integrated as the key raw material Beta Picoline (pyridine) is produced in house. The company has commissioned 10,000 MT capacity of Vitamin B3 (Niacinamide; second largest producer) in November 2011 (c30% utilisation), which at peak level has the potential to generate revenue of over USD7580mn. Similarly, the company has set up a Symtet plant with total capacity of 24,000 MT (two phases) which is likely to go on stream Q3FY13 onwards and has revenue potential of USD90mn at peak level. With commissioning of the new intermediate plant in 3Cyanopyridine, JOL has expanded its capacity 20% (52,000 MT) for in house consumption to meet growing demand of Vitamin B3 (Niacinamide) in the nutrition division. It will also help attain higher economy of scale and support strong demand for internal consumption. The company plans to launch 10 products including Symtet in FY13-14E. JOL has invested overall USD90-100mn on these two facilities which at peak level can generate revenue of USD150160mn.
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Edelweiss Securities Limited
Pharmaceuticals Fig. 3: Moving up the value chain
Molasses
Pyridines
Pyridine Derivatives
Beta Picoline
Beta Picoline Derivatives
Acetaldehyde
Alcohol
+ Formaldehyde
Methanol
3-Cynaopyridine Niacinamide (B-complex vitamin) Source: Company; Edelweiss research
Consistent performance over five quarters; momentum to accelerate JOL has also posted strong recovery over the past four-five quarters with consistent improvement in revenue and margin. The improvement is largely driven by 40% growth in pharmaceuticals business where formulation business in US (12.6% of overall revenue; grew 161%) and APIs (10.5% of revenue; grew 33%) were key growth contributors. Management has guided for 20-25% revenue CAGR over the next two-three years, driven by ramp up in new capacities such as Symtet plant, Pyridine capacity (20% increase) and Niacinamide plant. Moreover, assured order book in CMO and new product launches in generic formulation, radio pharmaceuticals and APIs further aid growth visibility.
Ramp-up in new capacity will add incremental revenue of USD150mn-160mn
14,000
28.0
11,200
23.0
8,400
18.0
5,600
13.0
2,800
8.0
(%)
(INR mn)
Chart 3: Continued growth momentum
3.0
0 Q1FY12 Sales (INR mn)
Q2FY12
Q3FY12
Q4FY12
EBITDA margin (%)
Q1FY13 PAT Margin (%) Source: Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals Deleveraging balance sheet The company has invested over INR50bn during FY07-12, via organic and inorganic initiatives, to build capabilities across the value chain. With the investment cycle behind us (USD3.5bn capex in FY13), incremental focus will be on improving productivity and reduce debt through internal accruals. JOL has debt repayment of INR2.1bn and INR3.8bn during FY13 and FY14E, respectively. The company is aiming to lower the DE from 1.5x in FY12 to less than 1.0x by FY15E and improve RoCE from the current 11.0% to 16.1% in FY14E. Going forward, management has indicated an annual capex of INR2.0-2.5bn.
Improving debt-equity and RoCE are key focus areas over the next 2-3 years
2.0
8,000
1.6
6,000
1.2
4,000
0.8
2,000
0.4
(X)
(INR mn)
Chart 4: DE will improve from 1.5x to 1x by FY14E 10,000
0
0.0 FY10
FY11 Capex
FY12
FY13E FY14E Debt equity ratio Source: Edelweiss research
Chart 5: Capital efficiency to improve 44.0 35.4
(%)
26.8 18.2 9.6 1.0 FY11
FY12 ROCE
FY13E
FY14E ROE Source: Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Valuation The macro environment for CRAMS business remains favourable, given India’s inherent cost advantage and chemistry skills. We believe that JOL will benefit from increased outsourcing from India, given its relationship with global pharmaceuticals and agro chemical players. Moreover, ramp up in capacity of Symtet and Vitamin B3 aid further growth visibility.
(INR)
Chart 6: Jubilant valuation trend – one-year forward PE 500 400
15x
300
12x 9x
200
6x 100
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
Apr-09
Dec-08
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
0
Source: Edelweiss research
Initiate coverage with ‘BUY’ rating We expect JOL to report revenue and earnings CAGR of 16.5% and 30% over FY12-14E. We have adjusted our earnings net of R&D expenses being capitalized and our EPS works out to be INR20.2 and INR28.8 for FY13 and14E respectively. With improved earnings visibility (30% earnings CAGR), focus on deleveraging balance sheet (expect DE to come down to 1x by FY14) and improved return ratios, we expect stock to trade in its long term one year forward average multiple of 10-11x. We have set a 12-m PE base target price of INR290 (10x FY14E; 40% upside potential). At CMP of INR 205, the stock is trading at 7.1x FY14 EPS of INR28.8. We initiate coverage with ‘BUY/ SP’ rating.
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Edelweiss Securities Limited
Pharmaceuticals
Key Risks Price volatility in PPES business can impact profitability Continuation of lower prices of Pyridine and nutritional ingredient business in global markets could impact margins and hence profitability of the company.
Entry of new generics can hit generic formulation growth High competitive scenarios and entry of new generics (especially in Methylprednisolone tab) could impact expected growth of formulations and API business.
Isotope supply risk Delay in availability of radio-isotopes will pose a risk to the radio pharmaceutical segment’s growth and hence can impact our earnings forecast adversely.
Regulatory risks 58% of JOL’ revenue comes from regulated markets. Any manufacturing issue/ regulatory issue adversely impact our estimates.
Currency risks 70% of JOL’ revenue comes from export. Rupee appreciation can adversely impact earnings. Moreover, the company has foreign currency dominated loan of USD440mn, which will also get impacted due to currency volatility.
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Edelweiss Securities Limited
Pharmaceuticals
Company Description JOL was founded in 1982 as a bulk chemicals producer and over the past decade has made a transition to an integrated solution provider in pharmal (51% of revenue) and LSI (49% of revenue) segments. The company now is one of the largest CRAMS players with presence in high-value derivatives like Pyridines, advance intermediaries, CMO, specialty pharmaceuticals like radio pharmaceuticals and drug discovery services.
Chart 7: Revenue break-up (Segment wise) Life Science Chemcials 22% Nutritional Ingredients Life 5% Sciences Ingredients (49% of sales) Proprietary Prod. & Excl. Synthesis 22%
API 10% Generics 13% Radio Pharmaceuticals 4% Allergenic Extracts 3%
Pharmacueticals (51% of sales)
Contract Manufacturing Healthcare DDDS 15% 6% 0% Source: Company, Edelweiss research
Within pharmaceuticals, the business segment is distributed between product and services where product business contributes 30% to pharmaceutical revenue while service segment contributes balance 21%. Within the LSI segment, PPES and Vitamins put together contribute 27% to revenue and balance 22% comes from life science chemicals. Proprietary products and exclusive synthesis (PPES) contribute 21% to revenue and enjoys operating margins in excess of 30%. JOL has a unique manufacturing process for these products, where the company has traditionally relied on molasses to derive Pyridine derivatives, unlike its peers who rely on crude. The company derives 58% of its business from regulated markets, which reported CAGR of 70% over the past five years.
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Edelweiss Securities Limited
Pharmaceuticals Chart 8: Revenue break-up (Geography wise) Asia & Others 7% China 7%
India 29%
Americas & Europe 57% Source: Company, Edelweiss research
Chart 9: Shareholding pattern Others 21%
DII 1%
Promoter 49%
FII 29%
Source: Company, Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Financial Outlook Expect 16.5% revenue CAGR over FY12-14E We expect 16.5% revenue CAGR over FY12-14E, driven by 17% CAGR in pharmaceutical segment and 16% CAGR in LSI segment. New order in CMO space and Strong pipeline in generics and API segment will drive growth in pharmaceutical segments while capacity ramp-up of Symtet and Niacinamide (Vitamin B3) will be key growth driver in Life Science Ingredient segment.
Table 4: Multiple growth drivers Jubilant Pharmacueticals API Generics Radio Pharmaceuticals Allergenic Extracts Contract Manufacturing DDDS Healthcare Life Science Ingredients Propreitory Prod. & Excl. Synthesis Nutritional Ingredients Life Science Chemicals Total
FY11 15,458 3,380 2,060 1,292 1,196 5,300 2,110 120 19,000 9,540 1,920 7,540 34,458
FY12 21,750 4,480 5,370 1,610 1,500 6,210 2,440 140 21,030 9,320 2,110 9,600 42,780
FY13E 25,182 5,152 6,176 1,932 1,500 7,706 2,562 154 24,472 11,361 2,743 10,368 49,654
FY14E 29,601 6,182 7,411 2,318 1,575 9,247 2,690 177 28,387 13,292 3,566 11,529 57,988
(INR mn) CAGR FY12-14E(%) 16.7 17.5 17.5 20.0 2.5 22.0 5.0 12.5 16.2 19.4 30.0 9.6 16.4
Source: Company; Edelweiss research
High margin business focus, improved realisation to boost profitability Over the past seven quarters, the pharmaceutical segment’s contribution has increased from 47.6% in Q3FY11 to 51.7% in Q1FY13, which has relatively better margins. As on FY12, the pharmaceutical segment contributed 51% to revenue and 60% to EBIDTA. We highlight that the company’s focus on high growth high margin business renders long-term growth visibility with improved profitability. Further, in the LSI segment, moving up the value chain from Pyridine to Symtet and Niacinamide will improve profitability. We highlight that despite strong volume growth in PPES, value growth was muted in FY12, largely on account of lower realisation. However, going forward, we expect prices of Vitamin B3 to improve as it will be difficult for competitors like Lonza and Vertillus to keep prices at the current level because of their high cost of production and higher crude oil prices. We highlight that Vertillus has taken two price hikes in the past three months. Moreover, vertical integration, cost control and higher capacity utilisation will further improve JOL’s profitability. Overall, we expect operating margins to improve from 19.8% in FY12 to 21.1% by FY14E.
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Edelweiss Securities Limited
Pharmaceuticals 53.0
7,844
48.2
6,729
43.4
5,615
38.6
4,500
33.8
(%)
(INR mn)
Chart 10: Operating margins to improve by 130bps over FY12-14E 8,958
3,386
29.0 FY10
FY11
FY12
Operating profit
FY13
FY14
Operating margins Source: Company; Edelweiss research
Aggressive accounting policy for R&D expenses JOL follows an aggressive accounting policy for R&D expenses and it capitalised INR1bn development cost in the balance sheet in FY12. These costs are primarily related to new product development at Draxis and ANDA development for the generic business. Most companies use a conservative approach to write off development cost in the same year it is incurred, as future economic benefits cannot be ascertained at the timing of filing of these products. The total intangible cost related to product development as on March 31, 2012, was INR31.4bn, of which INR180mn was being amortised from P&L in FY12. We highlight that JOL’ aggressive accounting policy aids profitability and we have adjusted the same through P&L account in our future estimates.
Table 5: Earnings adjusted to R&D capitalisation PAT EPS(INR) R&D Amortized(adjusted in P & L) Impact net of Tax Adj. PAT Adj. EPS(INR) Growth in EPS(%)
FY12 3,383.5 21.3 820.0 688.8 2,694.7 16.9
FY13E 3,886.9 24.5 900.0 675.0 3,211.9 20.2 19.2
(INR mn) FY14E 5,332.3 33.6 1,000.0 750.0 4,582.3 28.8 42.7
Source: Company; Edelweiss research
30% earnings CAGR over FY12-4E Strong revenue growth (16.5% CAGR) coupled with 130bps margins improvement will lead to 30% earnings CAGR over FY12-14E. Owing to higher capacity utilization and strong operating performance, we expect RoE and RoCE to improve from 15% and 11% in FY12 to 18.3% and 15% by FY14.
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Edelweiss Securities Limited
Pharmaceuticals
20.0
4,774
17.2
4,121
14.4
3,469
11.6
2,816
8.8
(%)
(INR mn)
Chart 11: Strong bottomline growth 5,426
2,164
6.0 FY10
FY11
FY12 PAT
FY13E
FY14E
PAT margin Source: Company; Edelweiss research
JOL to generate free cashflow of INR11bn-12bn over FY12-15E With investment cycle behind us and significant improvement in operating cycle, we expect JOL to generate free cash flow of INR11-12bn over FY12-15E (net of capex). We highlight that this cash flow will largely be used to repay the debt as company has set a target to bring down DE less than 1x by FY15.
Table 6: Positive cash flow FY13 onwards EBITDA Interest Increase in WC Tax Operating cash Capex Free cash flow Cash in hand Total free cash Total debt Inc. borrowing / (repayment) Net Debt to Equity (x)
FY12 8,485 (2,096) (4,171) (684) 1,534 (11,415) (9,881)
FY13E 10,223 (2,348) (1,370) (1,374) 5,132 (3,500) 1,632
FY14E 12,246 (2,092) (1,271) (1,859) 7,025 (2,500) 4,525
FY15E 14,198 (1,800) (2,054) (2,370) 7,975 (2,500) 5,475
38,186 4,500 1.64
36,686 (1,500) 1.37
32,186 (4,500) 1.02
27,686 (4,500) 0.73
(INR mn) Total 36,668 (6,239) (4,695) (5,602) 20,132 (8,500) 11,632 2,249 13,881
Source: Company; Edelweiss research
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Edelweiss Securities Limited
Pharmaceuticals
Financial Statements Key assumptions Macro -
GDP (Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector CMO growth (Y-o-Y %) Company - CMO Growth(Y-o-Y %) Generic Formulation growth (%) New product launch in US API growth (%) Radiopharma growth (%) Symtet capacity utilisation (%) USD/INR (Avg)
FY11 8.4 9.9 6.8 45.6 15.0 17.0 161.0 5.0 33.0 25.0
FY12 6.5 8.8 8.5 47.9 15.0 10.0 15.0 8.0 15.0 20.0
45.6
47.9
FY13E 5.8 7.8 7.5 53.5 15.0 20.0 20.0 10.0 20.0 20.0 35.0 52.0
FY14E 6.5 6.0 6.8 52.0 15.0 17.0 20.0 10.0 17.0 20.0 70.0 51.0
Note: Currency sensitivity - Every 10% rupee depreciation will have positive impact of 5% on EBITDA
Income statement Year to March Net revenues Total operating expenses Materials cost Employee cost EBITDA Depreciation and amortisation EBIT Net Interest expense/(income) Profit before tax (excl extraordinaries) Provision for tax Core profit Minority Interest Reported profit after minority interest Adjusted profit after tax Equity shares outstanding (mn) EPS (INR) reported Adj. EPS (INR) (Ex-R&D) Dividend payout (%)
FY11 34,332 28,885 13,400 7,184 5,536 1,800 3,736 1,051 2,815 134 2,681 (25) 2,292 2,706 159 17.0 13.5 11.8
FY12 42,540 34,297 16,275 8,364 8,485 2,207 6,279 2,096 4,379 684 3,695 311 146 3,384 159 21.2 16.9 14.1
FY13E 49,654 39,673 18,620 10,328 10,223 2,500 7,723 2,348 5,495 1,374 4,122 235 3,887 3,887 159 24.4 20.2 12.3
(INR mn) FY14E 57,988 45,985 21,920 11,830 12,246 2,800 9,446 2,092 7,434 1,859 5,576 245 5,331 5,331 159 33.5 28.8 9.0
Common size metrics- as % of net revenues Year to March Cost of revenues Employee cost Total operating expenses Depreciation and Amortisation EBITDA margins Net profit margins
FY11 38.9 20.9 83.9 5.2 16.1 7.8
FY12 38.0 19.5 80.2 5.2 19.8 8.7
FY13E 37.3 20.7 79.5 5.0 20.5 8.3
FY14E 37.6 20.3 79.0 4.8 21.0 9.6
Growth metrics (%) Year to March Revenues EBITDA Net profit Adj. EPS
FY11 1.7 (32.8) (40.8) (45.8)
FY12 24.3 53.3 37.8 25.6
FY13E 16.6 20.5 11.5 19.2
FY14E 16.7 19.8 35.3 42.7
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Edelweiss Securities Limited
Pharmaceuticals Balance Sheet As on 31st March Share capital Revenue and surplus Shareholder fund Minority interest Long term borrowings Short term borrowings Loan funds Deferred tax liability/asset Sources of funds Tangible assets Intangible assets CWIP (incl. intangible) Total net fixed assets Non current investments Cash and cash equivalents Inventories Sundry debtors Loans & advances Other assets Total current assets (ex cash) Trade payable Other current liabilities and provisions Total current liabilities & provisions Net current assets (ex cash) Application of funds
FY11 159 21,563 21,723 418 28,365 10,893 39,258 1,712 63,111 23,074 16,837 6,667 46,578 328 10,451 6,913 5,204 5,519 327 17,963 5,174 7,035 12,209 5,755 63,111
FY12 159 23,138 23,298 690 28,399 9,790 38,189 2,137 64,314 27,428 17,173 6,855 51,457 192 2,672 10,202 6,527 6,123 1,183 24,035 8,370 5,673 14,043 9,993 64,314
FY13E 159 26,547 26,707 924 29,015 7,671 36,686 2,137 66,454 33,880 18,577 0 52,457 192 2,446 10,203 7,346 7,258 1,183 25,990 11,155 3,476 14,631 11,359 66,454
(INR mn) FY14E 159 31,401 31,560 1,169 24,515 7,671 32,186 2,137 67,052 35,301 16,856 0 52,157 192 2,072 11,598 8,261 8,675 1,183 29,717 13,028 4,059 17,087 12,630 67,052
Free cash flow Year to March Net profit Depreciation Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow
FY11 2,267 1,800 598 4,665 741 3,925 4,980 (1,056)
FY12 457 2,207 3,171 5,835 4,171 1,663 11,415 (9,751)
FY13E 4,122 2,500 3 6,625 1,370 5,255 3,500 1,755
(INR mn) FY14E 5,576 2,800 8,376 1,271 7,105 2,500 4,605
Cash flow metrices Year to March Operating cash flow Financing cash flow Investing cash flow Net cash flow Capex Dividends paid
FY11 3,925 4,883 (2,744) 6,064 (4,980) (319)
FY12 1,663 (655) (11,279) (10,271) (11,415) (478)
FY13E 5,255 (1,978) (3,500) (223) (3,500) (478)
FY14E 7,105 (4,978) (2,500) (373) (2,500) (478)
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Edelweiss Securities Limited
Pharmaceuticals Profitability and liquidity ratios Year to March ROAE (%) ROACE (%) Inventory days Debtors days Payable days Cash conversion cycles Current ratio Debt/ EBITDA Debt/equity Adjusted debt/Equity
FY11 12.4 7.2 188 55 173 70 1.5 7.1 1.8 1.8
Operating ratios (x) Year to March Total asset turnover Fixed asset turnover Equity turnover
FY12 15.0 11.0 192 50 152 90 1.7 4.5 1.6 1.6
FY11 0.6 1.1 1.6
Valuation parameters Year to March Adjusted EPS (INR) EPS YoY growth (%) CEPS (INR) Diluted PE (x) Price/BV(x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%)
FY11 13.5 (45.8) 28.3 15.2 0.5 1.8 11.2 1.0
FY13E 15.5 12.3 200 51 191 59 1.8 3.6 1.4 1.4
FY12 0.7 1.7 1.9
FY14E 18.3 14.6 182 49 201 29 1.7 2.6 1.0 1.0
FY13E 0.8 1.6 2.0
FY14E 0.9 1.7 2.0
FY12 FY13E FY14E 16.9 20.2 28.8 25.6 19.2 42.7 35.1 40.1 51.0 12.1 10.2 7.1 0.5 0.5 0.5 1.6 1.4 1.1 8.1 6.6 5.2 1.5 1.5 1.5 Note: Adjusted EPS is post R&D costs that are capitalized
Peer comparision valuation
Jubilant* Dishman Divi's CRAMS
Price INR 205 96 1,100
EPS (INR) FY13E FY14E 20.2 28.8 10.7 14.9 50.6 63.3
P/E (x) FY13E FY14E 10.2 7.1 9.0 6.5 21.8 17.4 13.6 10.3
EV/EBITDA (x) FY13E FY14E 6.0 4.7 5.9 4.9 17.0 13.8 11.5 9.4
ROAE (%) FY13E FY14E 15.5 18.3 8.8 11.1 28.3 28.7 18.6 19.9
Source: Edelweiss research *Note: Jubilant EPS is adjusted for R&D costs capitalised
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Edelweiss Securities Limited
Pharmaceuticals NOTES:
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Edelweiss Securities Limited
Pharmaceuticals NOTES:
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Edelweiss Securities Limited
Pharmaceuticals
RATING & INTERPRETATION
Company
Apollo Hospitals Enterprise Cadila Healthcare Dr.Reddys Laboratories Ipca Laboratories Ranbaxy Laboratories Torrent Pharmaceuticals
Absolute
Relative
Relative
Reco
reco
risk
Buy
SO
M
Company
Aurobindo Pharma
Absolute
Relative
Relative
reco
reco
Risk
BUY
SP
H
BUY
SO
L
Cipla
BUY
SO
L
HOLD
SP
M
Glenmark Pharmaceuticals
BUY
SO
H
BUY
SO
L
Lupin
BUY
SO
M
REDUCE
SU
H
Sun Pharmaceuticals Industries
HOLD
SO
L
BUY
SO
H
ABSOLUTE RATING Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
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Edelweiss Securities Limited
Pharmaceuticals
ORION - The Edelweiss Trading Platform Edelweiss Edge •
Amongst the largest domestic brokers in the Cash and Derivatives Segment
•
Widest client coverage – 400 Active clients serviced by the largest Sales and Sales-Trading team giving you access to extensive flow in Indian Markets
•
40% of volumes currently traded through automated strategies
•
Over 100 clients currently trading through FIX
•
One of the highest block closing ratios at 65%
•
One of the largest and most evolved Quantitative Research desks in India
Edelweiss Orion Technology is changing the way Indian Markets are traded. Orion is Edelweiss’s endeavor to provide clients with a trading solution by automating the entire process; a product built on cutting edge technology – customized to suit the Indian context Global Standards: Edelweiss Orion is an Algorithmic Execution System supported by FlexTrade, global leader in broker neutral trading platforms. With awards like Best Buy-Side EMS, Best Algo Trading Vendor and Best Execution Management System to its credit, FlexTrade is the preferred technology partner to 120+ institutions globally Robust Risk Management: The steadfast Edelweiss' Risk Management System (ERMS) has a proven track record – the system oversees around one million trades per day. Each order is checked extensively against risk parameters, without compromising latency. The active check & alert system allows risk-mitigation with minimal interruptions and keeps you safe from that occasional fat finger! Tailored to Indian markets: Edelweiss' uncompromising track record stems from our strong understanding of Indian market intricacies. The logic behind Orion, developed entirely in-house, imbibes these characteristics making it the best choice to trade Indian markets Flexible and Adaptable: In a world where execution algorithms are increasingly becoming commoditized, we believe adaptability and flexibility hold the key to performance. With the development and servicing teams dedicated entirely to traders on Indian equities, Edelweiss Orion is capable to deliver customer satisfaction through product customization and iterative enhancements Extensive Accessibility: ORION algorithm suite is readily accessible via Bloomberg EMSX. Edelweiss has working relationship with major FIX vendors which enables us to swiftly extend access to ORION via other channels.
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Edelweiss Securities Limited
Pharmaceuticals Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91-22) 4009 4400, Email:
[email protected] Vikas Khemani
Head Institutional Equities
[email protected]
+91 22 2286 4206
Nischal Maheshwari
Co-Head Institutional Equities & Head Research
[email protected]
+91 22 4063 5476
Nirav Sheth
Head Sales
[email protected]
+91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Pharmaceuticals Apollo Hospitals Enterprise, Aurobindo Pharma, Cadila Healthcare, Cipla, Dr.Reddys Laboratories, Glenmark Pharmaceuticals, IPCA Laboratories, Lupin, Ranbaxy Laboratories, Sun Pharmaceuticals Industries, Torrent Pharmaceuticals
Recent Research Date
Company
Title
Price (INR)
08-Oct-12
Pharma
Buoyant quarter, pricing policy an overhang; Result Preview
05-Oct-12
Pharma
Supreme Court order advocates cost base pricing; Sector Update
03-Oct-12
Dr. Reddy’s Strong momentum in ensuing Lab quarters; Visit Note
1,646
Recos
Hold
Distribution of Ratings / Market Cap Rating Interpretation
Edelweiss Research Coverage Universe
Rating Distribution* * 1 stocks under review > 50bn Market Cap (INR)
114
Buy
Hold
113
53
Reduce
Total
19
186
Between 10bn and 50 bn
< 10bn
58
Rating
Expected to
Buy
appreciate more than 15% over a 12-month period
Hold
appreciate up to 15% over a 12-month period
Reduce
depreciate more than 5% over a 12-month period
14
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Edelweiss Securities Limited
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