We revise our financial estimates on JLS for FY20 and FY21 to account for the revised prices in commodity chemicals business, ongoing impact of remediation measures on supply of API / solid dosage business and lower our estimates for Ruby fill for FY21. lower our target P/E multiple to 12x from 13x and arrive at a target price (TP) of Rs785.
Concerns overplayed We maintain BUY on JUBILANT following an 8/12% beat on our EBITDA/PAT estimates for 1QFY20. Our TP is revised at Rs 845 (12x Jun-21E EPS) with a 5/10% cut to our FY20/21E EPS due to higher interest cost and tax rate.
We expect the pharma business to be stable as RubyFill is gaining market share. However, considering Roorkee WL, pressure on LSI, and a higher tax rate, we have a negative view for FY20 than our earlier assumption. We expectthe improving situation for Vitamin B3 and CMO’s additional capacities(starting a second line in H2FY20, commissioning Lyo in FY20) to provide aid tothe company’s performance. Considering the recent correction in the market,we have a BUY rating, with a TP of Rs 750 (10x FY21E EPS).
We expect specialty pharma to maintain growth momentum thanks strong growth and prospects for CDMO business. However, Official action Indicated (OAI) status to Nanjangud API facility is a likely stumbling block in the near term. Similarly, on the generics front, we expect some slowdown and costs escalation on account of warning letter to Roorkee facility. On the LSI front, despite inventory adjustment, EBITDA margins were disappointing and things are unlikely to improve in the next few quarters. In this backdrop, the performance pharma will be the main lever in the near future. We cut our EPS estimates by ~20% in both FY20 and FY21 due to these factors. We arrive at our target price of ~| 710 based on 10x FY21E EPS of Rs 70.8.
We reduce our EPS estimate by 5%/7% for FY20/21 to factor in remediation cost associated with compliance in the pharma segment, further penalties associated with non-supplies to customers, and reduced prices in LSI products. We also reduce EV/EBITDA multiple for pharma to 9x (prior: 10x) and for LSI to 5x (prior: 6x) to factor in (a) regulatory risk in the pharma segment, (b) gradual pick-up in radio-pharma, and (c) subdued outlook for the Life Science Chemical Segment. Accordingly, we roll our price target to INR800 on SOTP-based valuation. At CMP of INR595, JUBILANT trades at an attractive valuation of 6.3x FY20 EV/EBITDA and 5.7x FY21 EV/EBITDA. Maintain Buy.