Jubilant Lifesciences reported strong Q1FY16 results with Ebitda rising 27% q-o-q.
Some factors at play included better pricing realisation in the nutrition ingredient business, cost control, lower impact of high cost inventory and a one-off take-or-pay contract.
Except for gains from the take-or-pay contract, other factors are likely to remain in place to a large extent.
There are additional drivers of Ebitda margin expansion, which have yet to play out. These include a rise in pyridine prices as China demand returns over the next 2-3 years, a rise in symtet capacity utilisation over time, an increase in volumes and better pricing in the CMO business and the recent depreciation of the rupee. We estimate revenue and Ebitda to record 9% and 33% CAGR, respectively, over FY15-18F.
We factor in Q1FY16 results, assume better pricing in the nutritional business and factor in recent currency movements into our FY16-18F estimates. Accordingly, we raise our FY16F/17F Ebitda by 15-16%, resulting in 40-50% increase in net earnings. We lower our capacity utilisation expectation from symtet (20% in FY17F vs 50% earlier).
The stock is trading at 15.25x FY16F diluted EPS of R23.3 and 10.1x FY17F diluted EPS of R35.2. Particularly on FY17F EPS, we think valuation remains undemanding, despite the recent run-up in the stock. Confronted with uncertainty around pyridine pricing and the CMO business, we value JOL at 9x one-year forward earnings. Given relatively higher earnings visibility, and our expectation of a recovery in ROE, we raise our fair value range to 10-13x (from 7-11x) and value JOL at 11.5x one-year forward EPS of R39.6 to arrive at our new 12-month target price of R459.