We maintain ?buy? on Jubilant Life Sciences with a September 2014e target price of R340. At the assigned target price, we value the stock at 10x September 2014e EPS (a 50% discount to pharma peers) primarily to incorporate smaller scale of operations and the nature of its businesses.
Jubilant is among the top Indian pharma outsourcing companies. After a torrid phase (FY09-11), we expect things to turn around ? some pick up in manufacturing services and restructuring of the research services business should aid profitability. We forecast a 14% CAGR in revenues and 26% in EPS over FY13-FY15e. Valuations are reasonably attractive and we see limited downside. However, we expect material re-rating only post visible signs of improvement in balance sheet over a few quarters.
The firm ended FY13 on a weak note. Strong revenue growth continued in the fourth quarter.
Jubilant?s Q4 revenues (up 18%, strong L/S chemicals and proprietary) were strong. Ebitda (down 3%, c12% lower versus Citi estimates) declined on lower gross margins (down 366 bps, pricing pressure in US and inferior mix). Recurring profit (down 20%, c25% lower against Citi estimates) was further depressed by higher effective tax rate (c37% versus 24% in first nine months of FY13). Strong operational performance continued in FY13 (revenue grew 21%, EBITDA increased 19%). However, lower gross margins and higher effective tax rate (c27% versus 15%) led to c25% miss (as against Citi estimates) on recurring PAT.
We have lowered our FY14 and FY15e earnings by 5% and 6% on higher tax rate guidance.
The firm has edge in three products in the US ? methylprednisolone, terazosin and lamotrigine. Niacinamide utilization is likely to pick up. The firm is awaiting response from US FDA with respect to Hollister facility warning. It is exploring options to raise debt through foreign currency bonds or non-convertible debentures (NCDs) of up to $250 million for debt repayment ? net debt levels to remain unchanged.