Buy J B Chemicals & Pharmaceuticals Ltd For Target Rs.550 - ANGEL BROKING LTD
National Pharmaceuticals Pricing Authority (NPPA) has notified one-time price increase of 50% from existing ceiling price in case of 21 drugs. This is in view of public interest to avoid shortage of those drugs due to significant price increase in APIs in recent past. Metronidazole is one of the compound where price has been increased and JB Chemicals manufactures four formulation products based on it. We estimate these products contribute ~10% of company’s India revenue or ~4% of total revenue. The company would increase the prices with the next manufacturing batch which would have a positive impact of ~5% on India formulations revenue. Overall, we raise revenue/PAT by 1-2/3-4% for FY21/22E respectively. Reiterate BUY.
* Surprising positive move by regulator: We view NPPA’s notification of one-time price increase to the tune of 50% for select 21 NLEM products. It is surprisingly positive for the industry as the regulators have been largely focused on reducing healthcare cost by capping the prices across pharma and hospitals verticals. It also indicates a sense of relief that the regulators are ready to help the industry where necessary. We expect JB Chemicals to benefit with this announcement as it can potentially raise prices in four metronidazole-based drugs, which currently contribute ~10% of India sales. Any price increase would raise India revenue by 5% and large part of this revenue increase post trade margin would translate directly to PBT.
* India business continues to outperform: India business (primary sales) grew 14.5% YoY in FY19 vs industry growth of ~10%. Recent AIOCD data suggests a further pickup in growth momentum to high double digits (~23%) backed by Cilacar and Nicardia franchises. Company is also expanding into new therapeutic areas such as nephrology, gynecology, orthopedic, etc. to broaden the product portfolio. We expect JBCPL to continue to outperform industry growth on primary sales and witness 15.6% revenue CAGR over FY19-FY22E. Increasing domestic revenues along with continued improvement in MR productivity would drive 220bps EBITDA margin expansion over next three years.
* Outlook: The key positive about the company is that ~43% of its total revenues and >55% of EBITDA comes from domestic formulations We expect 17.5% PAT CAGR over FY19-FY22 led by strong growth in India and 220bps margin expansion. RoIC would improve from 17.0% in FY19 to 24.9% in FY22E.
* Valuations and risks: We believe the stock is undervalued at 12.4xFY21E EPS and FCF yield of more than 6%. We maintain BUY with a revised target of Rs550/share based on 15xSep21E EPS (earlier Rs530). Key downside risks are: slowdown in India growth and escalation of ranitidine impurity issue.