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Friday, August 29, 2008

Future MultiBagger Stock:Jubilant Organosys

Multi Bagger:Jubilant Organosys
Recommended Price Rs.358.90
PN Vijay, Portfolio Manager
Report Dated: August 25, 2008

Jubilant- A Multi-faceted Pharma giant in the making
Jubilant Organosys Limited is an integrated pharmaceutical industry player with a wide range of products and services for global life sciences companies. The Company is one of the largest Contract Research and Manufacturing Services (CRAMS) and Drug Discovery and Development Services (DDDS) organizations in India. Jubilant has a presence in generic pharmaceuticals business in the US and supply dosage forms along with regulatory services to European generic companies.

Jubilant’s business interests are in three main segments - Pharmaceuticals & Life Science Products, Industrial Products and Performance Polymers. Each segment has independent growth units with clear performance and growth objectives. It is the leading manufacturer - worldwide - in distinct product segments including selective APIs, Pyridine and its derivatives, Solid Polyvinyl Acetate, Vinyl Pyridine Latex and Organic intermediates such as Ethyl Acetate, Acetic Anhydride and Acetaldehyde. Its product line comprises of a wide range of high value added chemicals for the pharmaceutical, agrochemical, confectionery, human and animal nutrition industries.

CRAMS- The New Growth Area for Pharma Companies:
CRAMS pertains to outsourcing services/ products from low-cost providers with world-class standards. Since late 1990s, CRAMS has gained more importance, as MNCs have come under pressure to maintain their profitability. It consists of contract manufacturing and contract research. India has become a major provider of these services due to its low cost labor, high expertise services, infrastructure and the time taken for regulatory clearance is less in India as compared to other countries. Over the last five years, CRAMS industry has been contributing close to eight percent to the total Indian pharmaceutical business. CRAMS require technical skills and a good R&D base.

Jubilant has successfully diversified into CRAMs and along with Divi’s, Dishman and a few others is a key player in the sector.

Financial Position:
In the FY’08 Jubilant witnessed an increase in the Sales by 37.5% to Rs 2489 crore and the EBIDTA grew by an impressive 4.2% to Rs 463.7 crore. Its net profit rose by 82.6% to Rs 309 crore. This is excellent growth by any standards. In the First Quarter FY’09 its sales rose by 35% to Rs 619 crore and the EBITDA also showed an increase of 43% to Rs 191.35 crore. Profit after tax declined by 91% to Rs 12.8 crore due to forex loss of Rs 107.6 crore compared to a gain of Rs 87.9 crore in Q1 of FY08. If this extra ordinary item is not taken into account the net profit was infact sharply higher by 119% to Rs 120.4 crore. In the current quarter the interest and depreciation went up by 63% and 73% respectively.

Product wise, the international revenue was also higher by 74% at Rs. 484.6 crore on account of volume growth in the outsourcing related segments comprising CRAMS and DDDS (Drug Discovery and Development Services). Its CRAMS revenue constitutes of 55% of its total revenue. Pharma and life science products and services (PLSPS) is the main force behind company’s profitability. It recorded a revenue growth of 72% to Rs 522.7 crore. The revenue from industrial products also increased by 28.4% to Rs 304 crore.

Investment positives:

High Entry Barriers:
CRAMS require high expertise, technical skills and R&D. The approval process for entering into CRAMS business is also long and complex. So established players have a great early mover advantage.

Research and Development:
R&D is the backbone of Jubilant. It includes technical, marketing and economics skills generating new products/processes/services. In 2002, it was one of the first Indian companies to enter drug discovery and development. It has an R&D team of over 1,050 scientists. Jubilant has more than 25 years of chemistry experience and undertakes more than 30 complex chemical reactions with global leadership in certain technologies. Jubilant's subsidiaries, Jubilant Biosys, Jubilant Chemsys and Jubilant Clinsys provide a range of functional as well as integrated services.

Acquisitions:
Jubilant Biosys Ltd and Amgen Inc, the largest US based Biotech company have announced a drug discovery partnership under which Amgen and Jubilant will collaborate to develop a portfolio of novel drugs in new target areas of interest across multiple therapeutic areas. Jubilant successfully completes acquisition of Canada based Draxis Speciality Pharmaceuticals Inc. for US$ 253 million. It had acquired Speciality Molecules Pvt. Ltd., a niche manufacturer of Speciality Intermediates with manufacturing facilities located in Ambarnath (near Mumbai) in India in 2008. Its other acquisitions are Hollister Stier (USA), Clinsys Clinical (USA), Cadista Pharma (USA) and PSI Supply (Belgium).

Going Global:
Jubilant Organosys has a presence across the entire pharmaceuticals value chain with facilities and establishments in the U.S., Europe and China. Jubilant Organosys Ltd became the first company in India to be the registered Organisational Stakeholder of Global Reporting Initiative.

Concerns:
China is emerging as a strong competitor to India in the CRAMS business and India’s rising wage cost is also a major concern. But then also the prospects for India to continue its momentum are high. One of the major concerns for Jubilant is also the kind of contracts it will get in the future. The company has high debt in its books because of which the interest cost is also very high.

Valuation:
Jubilant Organosys has shown a strong growth in profits during the period. It has reported a quarterly EPS of Rs 8.33 (excluding extraordinary charge), which translates to an EPS of around Rs 33.32 per share for FY09. At CMP of Rs 358.90, it trades at a P/E of around 10.92. The PEG ratio (PE/growth in NP) comes to 0.08. We recommend the stock as an excellent investment with a target price of Rs 590.

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