4QFY14 Result Update

Institutional Equities

Jubilant Life Sciences 27 May 2014

Reuters: JULS.BO; Bloomberg: JOL IN

Recovery Likely To Be Gradual, But Valuation Comfort Remains Impacted by the warning letter from the US Food and Drug Administration (USFDA) for its Spokane facility, Jubilant Life Sciences (JLSL) reported EBITDA margin of 15.7% for 4QFY14 against our/Bloomberg consensus estimates of 17.7%/17.5%, respectively. While the full impact (from 2QFY15 onwards) of the price hikes in radio-pharmaceuticals and vitamin businesses should buoy the margins going forward, we believe the recovery will be gradual owing to remediation costs relating to Spokane facility and the delay in stabilisation of Symtet plant for large-scale commercialisation. Consequently, we have factored in a 140bps improvement in margins over FY14-FY16E. We have broadly maintained our estimates at the operating level, but as the company is refinancing its local debt with forex debt worth ~US$200mn, we have increased our FY15/FY16 estimates by 17%/12%, respectively, factoring in lower interest costs. We continue to maintain that debt reduction is key for JLSL’s re-rating, but with its valuation at 7xFY15E and 5xFY16E EPS (lowest among the sector and close to historical bottom), we believe the stock factors in the worst and has little downside risk. We have retained Buy rating on JLSL, valuing it at 6xFY16E EPS of Rs37.7 to arrive at a target price of Rs226. Margins falter, recovery likely in 2HFY15: JLSL posted flat volume growth (~10% of revenue growth was driven by favourable currency movement and ~2% due to price hikes) and EBITDA margin of 15.7% for 4QFY14, significantly below our/Bloomberg consensus estimates. The company reported exceptional gains of Rs364mn which includes MTM gains of Rs400mn and Rs100mn loss on amortisation of unrealised exchange loss on long-term foreign currency loan, among other things. Pharmaceuticals business growth was flat with its margin at 18.8% (350bps fall QoQ) while life science ingredients (LSI) business grew 24%YoY with its margin at15.3% (flat QoQ). While 1HFY14 was impacted by price erosion in Methylprednisolone, the second-half was impacted by lower inventory off-take in the contract manufacturing business (overall gross margin declined 320bpsQoQ in 4QFY14). JLSL expects full impact of the price hikes (18% price hike in Niacin feed grade in 4QFY14) in the vitamin and radio-pharmaceuticals businesses to reflect in better operating performance from 2QFY15, but with a planned three-week shutdown at the Spokane facility in 1QFY15, higher compliance costs and delay in stabilisation of Symtet plant (we expect it in 2HFY15), we feel there will be a gradual recovery in margins. Financial arrangement with IFC for loan refinancing: JLSL and IFC (International Finance Corporation) have entered into a financial arrangement through which IFC will lend US$147.5mn to Jubilant Pharma, a wholly-owned arm of JLSL. Please note that JLSL has transferred its API and dosage form businesses to Jubilant Pharma for Rs11.5bn and the funds from IFC will be used to finance these. JLSL, in turn, will use the funds to repay its local debt in FY15E (~Rs11.7bn coming up for repayment). While this will take care of the debt repayment for now, we believe JLSL’s re-rating will depend on a concrete road-map for debt reduction. IFC will lend the above sum in two tranches – US$87.5mn (seven-year term loan at LIBOR+450bps), US$60mn (convertible over the next six years). Further, IFC will also syndicate JLSL’s debt of US$52mn, repayable over five years. With swapping of the high-cost local debt (at ~12%) with forex loans, we expect a commensurate decrease in interest costs, as a result of which we have revised our earnings estimates upward by 17%/12% for FY15/FY16, respectively. Y/E March (Rsmn) Net revenue Total material costs Personnel costs Other expenses PBIDT PBIDT/net revenue (%) Other income Interest costs Depreciation PBT Exceptional item Tax Tax/PBT (%) Minority interest Reported PAT Adjusted PAT

4QFY13 13,920 5,885 2,484 3,184 2,368 17.0 75 591 695 1,156 972 429 37.1 65 (310) 663

3QFY14 14,428 5,953 2,811 3,168 2,496 17.3 50 846 733 967 (105) (488) (50.5) 126 1,434 1,329

4QFY14 15,623 6,949 2,837 3,379 2,458 15.7 50 750 687 1,072 (364) 352 32.9 96 988 624

YoY (%) 12.2 18.1 14.2 6.1 3.8 (32.3) 27.0 (1.2) (7.3) (137.4) (17.8) 46.0 (419.1) (5.8)

BUY Sector: Pharmaceuticals CMP: Rs186 Target Price: Rs226 Upside: 22% Praful Bohra [email protected] +91-22-3926 8175 Sumit Singhania [email protected] +91-22-3926 8111 Key Data Current Shares O/S (mn)

Please refer to the disclaimer towards the end of the document.

29.6/504.7

52 Wk H / L (Rs)

194/65

Daily Vol. (3M NSE Avg.)

412,162

Price Performance (%) Jubilant Life Nifty Index Source: Bloomberg

QoQ (%) 8.3 16.7 0.9 6.7 (1.5) 1.6 (11.4) (6.3) 10.9 246.6 (172.2) (24.2) (31.1) (53.0)

Source: Company, Nirmal Bang Institutional Equities Research

159.3

Mkt Cap (Rsbn/US$mn)

FY13 51,637 20,548 9,622 11,162 10,305 20.0 176 2,302 2,538 5,641 2,230 1,524 27.0 361 1,527 3,757

1M

6M

1 Yr

10.2

46.3

19.0

8.5

21.5

21.0

FY14 57,984 24,421 11,052 12,527 9,984 17.2 200 3,044 2,812 4,329 2,220 696 16.1 286 1,127 3,347

YoY (%) 12.3 18.8 14.9 12.2 (3.1) 14.0 32.2 10.8 (23.3) (0.5) (54.3) (20.7) (26.2) (10.9)

Institutional Equities Key conference-call highlights 1) JLSL plans to launch Ruby-fill, a US$70mn radio-pharmaceutical product, in 3QFY15 under the 505B(2) route. 2) JLSL has given capex guidance of Rs3bn for FY15 (including Rs1bn of spill-over capex from FY14). Exhibit 1: Financial summary Y/E March (Rsmn) Revenue YoY (%) EBITDA EBITDA (%) Reported PAT Adj. PAT YoY (%) Fully DEPS Adj. EPS RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY12

FY13

FY14

FY15E

FY16E

43,031 24.9 8,870 20.6 146 3,644 34.4 0.9 22.9 16.2 10.5 8.1 7.3

51,610 19.9 10,495 20.3 1,527 3,824 5.0 9.6 24.0 15.9 12.1 19.4 6.1

57,984 12.4 9,984 17.2 1,127 3,347 -12.5 7.1 21.0 13.1 10.7 26.3 6.2

65,319 12.7 11,584 17.7 4,336 4,336 29.6 27.2 27.2 15.4 12.4 6.8 5.2

74,170 13.6 13,769 18.6 6,002 6,002 38.4 37.7 37.7 18.3 14.7 4.9 4.1

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 2: Revenue summary Revenue break-up (Rsmn)

FY13

FY14

Growth (%)

Pharmaceuticals Contract Mfg. o/s (CMO) APIs Specialty pharmaceuticals Radio-pharmaceuticals Allergenic extracts Drug discovery & development solutions (DDDS) Generics Healthcare

26,620 7,100 5,080 3,860 2,090 1,770 2,080 8,310 190

27,270 6,960 5,280 4,240 2,410 1,830 1,840 8,760 190

2.4 (2.0) 3.9 9.8 15.3 3.4 (11.5) 5.4 -

Life science ingredients Proprietary products & exclusive synthesis Life science chemicals (LSC) Nutritional ingredients Total

25,030 11,210 11,170 2,650 51,650

30,760 13,280 13,520 3,960 58,030

22.9 18.5 21.0 49.4 12.4

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Actual performance versus our estimates, Bloomberg consensus estimates Particulars (Rsmn) Revenue EBITDA EBITDA margin (%) Reported PAT Adjusted PAT*

Actual 15,623 2,458 15.7 988 624

Our estimates 14,718 2,603 17.7 666 666

Variation (%) 6.2 (5.6) 48.4 (6.3)

Bloomberg cons.est. 14,848 2,605 17.5 790 790

Variation (%) 5.2 (5.6) 25.1 (21.0)

Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research

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Jubilant Life Sciences

Institutional Equities Exhibit 4: Change in our FY14/FY15 earnings estimates FY14E (Rsmn) Revenue EBITDA EBITDA margin (%) Reported PAT

FY15E

Old

New

Change (%)

Old

New

Change (%)

64,177 11,580 18.0 3,700

65,319 11,584 17.7 4,336

1.8 (30bps) 17.2

73,528 13,654 18.6 5,353

74,170 13,769 18.6 6,002

0.9 0.8 12.1

22-May-13

22-May-14

Source: Nirmal Bang Institutional Equities Research

Exhibit 5: P/E chart (x) 25

20 15 10 5

0 22-May-09

22-May-10

22-May-11

22-May-12

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Rating track Date 20 May 2013 9 July 2013 5 August 2013 7 October 2013 30 October 2013 6 December 2013 7 January 2014 7 February 2014

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Rating Buy Buy Buy Buy Buy Buy Buy Buy

Market price (Rs) 159 119 90 83 101 126 127 132

Target price (Rs) 257 257 160 160 160 156 156 168

Jubilant Life Sciences

Institutional Equities Financials Exhibit 6: Income statement Y/E March (Rsmn) Net sales % growth Raw material costs Staff costs R&D expenses Other expenses Forex loss Total expenditure EBITDA % growth EBITDA margin (%) Other income Interest costs Gross profit % growth Depreciation Exceptional items Profit before tax Tax Effective tax rate (%) Net profit % growth Minority interest Reported net profit % growth Adjusted net profit % growth

FY12

Exhibit 7: Cash flow FY13

FY14

FY15E

FY16E

43,031 51,610 57,984 65,319 74,170 24.9 19.9 12.4 12.7 13.6 (16,275) (20,500) (24,421) (26,770) (29,796) (8,364) (9,622) (11,052) (12,769) (14,493) (346) (447) 0 0 0 (9,080) (10,285) (12,527) (14,195) (16,112) (97) (260) 0 0 0 (34,161) (41,115) (47,999) (53,735) (60,401) 8,870 10,495 9,984 11,584 13,769 56.9 18.3 (4.9) 16.0 18.9 20.6 20.3 17.2 17.7 18.6 358 289 200 250 300 (2,382) (2,537) (3,044) (2,539) (2,213) 6,846 8,246 7,141 9,295 11,856 48.1 20.5 (13.4) 30.2 27.6 (2,207) (2,538) (2,812) (3,106) (3,394) (3,498) (2,297) (2,220) 0 0 1,141 3,411 2,110 6,188 8,461 (684) (1,524) (696) (1,547) (2,115) 60.0 44.7 33.0 25.0 25.0 457 1,888 1,413 4,641 6,346 (80) 313 (25) 228 37 (311) (361) (286) (305) (345) 146 1,527 1,127 4,336 6,002 (93.7) 948.8 (26.2) 284.7 38.4 3,644 3,824 3,347 4,336 6,002 34.4 5.0 (12.5) 29.6 38.4

Y/E March (Rsmn) EBIT

FY12

FY13

FY14

FY15E

FY16E

6,663

7,957

7,173

8,478

10,375

(Inc.)/dec. in working capital

(1,765)

(554)

2,008

(1,729)

(1,364)

Cash flow from operations

4,899

7,403

9,180

6,748

9,011

358

289

200

250

300

Other income Depreciation

2,207

2,538

2,812

3,106

3,394

(2,382)

(2,537)

(3,044)

(2,539)

(2,213)

Tax paid (-)

(684)

(1,524)

(696)

(1,547)

(2,115)

Dividends paid (-)

(370)

(555)

(559)

(554)

(554)

Minority Interest (-)

(311)

(361)

(286)

(305)

(345)

Interest paid (-)

Net cash from operations

3,715

5,253

7,607

5,159

7,477

Capital expenditure (-)

(9,397)

(5,374)

(4,480)

(3,500)

(3,500)

Net cash after capex

(5,681)

(121)

3,127

1,659

3,977

Inc./(dec.) in short-term borrowing

5,177

1,517

2,400

0

0

Inc./(dec.) in long-term borrowing

(6,256)

(1,787)

(3,743)

(289)

(4,658)

Inc./(dec.) in borrowings

(1,078)

(269)

(1,343)

(289)

(4,657)

(Inc.)/dec. in investments

135

(64)

(84)

0

0

(943)

(334)

(1,427)

(289)

(4,657)

Others

(1,155)

1,343

(465)

0

0

Opening cash

10,451

2,672

3,560

4,795

6,165

2,672

3,560

4,795

6,165

5,484

(7,780)

889

1,235

1,370

(681)

FY14

FY15E

FY16E

Cash from financial activities

Closing cash Change in cash

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 9: Key ratios

Exhibit 8: Balance sheet Y/E March (Rsmn) Equity Reserves Net worth Short-term loans Long-term loans Total loans Deferred tax liability Minority interest Liabilities Gross block Depreciation Net block Capital work-in-progress Long-term Investments Inventories Debtors Cash Other current assets Total current assets Creditors Other current liabilities Total current liabilities Net current assets Other non-current assets Total assets

FY12 159 23,138 23,298 7,671 30,507 38,178 2,137 690 64,303 60,841 16,239 44,602 6,855 192 10,202 6,527 2,672 6,580 25,981 8,370 5,684 14,054 11,927 726 64,303

FY13 159 24,784 24,944 9,188 28,721 37,909 2,740 1,115 66,707 68,701 19,027 49,675 4,369 256 11,149 7,100 3,560 7,701 29,510 10,562 6,549 17,112 12,399 9 66,707

FY14 159 26,111 26,270 11,588 24,977 36,565 2,371 1,579 66,785 72,201 21,839 50,363 5,349 340 13,418 8,067 4,795 6,282 32,562 13,808 8,026 21,834 10,728 6 66,785

FY15E 159 29,893 30,052 11,588 24,688 36,276 2,371 1,579 70,278 76,701 24,945 51,756 4,349 340 14,740 9,412 6,165 6,994 37,311 15,458 8,026 23,484 13,827 6 70,278

FY16E 159 35,338 35,498 11,588 20,030 31,618 2,371 1,579 71,066 81,201 28,339 52,862 3,349 340 16,326 10,280 5,484 7,821 39,912 17,376 8,027 25,403 14,509 6 71,066

Y/E March

FY12

FY13

Per share (Rs) Reported EPS

0.9

9.6

7.1

27.2

37.7

Adjusted EPS

22.9

24.0

21.0

27.2

37.7

DPS

3.0

3.0

3.0

3.0

3.0

146.2

156.6

164.9

188.6

222.8

15.2

14.5

16.6

12.8

9.2

RoE (%)

16.2

15.9

13.1

15.4

18.3

RoCE (%)

10.5

12.1

10.7

12.4

14.7

P/E (x)

8.1

19.4

26.3

6.8

4.9

P/BV (x)

1.3

1.2

1.1

1.0

0.8

EV/net sales (x)

1.5

1.2

1.1

0.9

0.8

EV/EBITDA (x)

7.3

6.1

6.2

5.2

4.1

0.7

0.8

0.9

0.9

1.0

BV/share Dividend payout (%) Performance ratios

Valuation ratios

Efficiency ratios Asset turnover (x) Working capital/sales (x)

0.26

0.23

0.17

0.18

0.18

Receivable days

55

50

51

53

51

Inventory days

87

79

86

83

81

Payable days

89

94

105

105

105

Source: Company, Nirmal Bang Institutional Equities Research

Source: Company, Nirmal Bang Institutional Equities Research

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Jubilant Life Sciences

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Jubilant Life Sciences