JB Chemicals & Pharma: Striving to drive sustainable growth

4 Sep 2023 , 12:44 PM

Recommendation: Buy; Target price: Rs 3150

JB Pharma’s FY23 Annual Report underlines the outcome of the new mgmt’s five-pronged strategy, for strengthening the India business and laying foundation for sustainable growth. JB continues to be one of the fastest-growing companies in the IPM driven by market beating growth for its five-pillar brands, increasing contribution of chronic therapies, PCPM improvement, accelerating pace of new launches, and robust execution in acquired portfolios. Analysts of IIFL Capital Services expect JB to sustain growth momentum, with mid-teens growth in India & CMO business over FY23-26, which should enable JB to expand its Ebitda margins (ex-ESOP) to 27-28% and drive 19% operating Ebitda Cagr over FY23-26. JB’s inherent strength of the branded generic franchise is also reflected in its strong cash generation, as net debt has further reduced from Rs2.7bn in FY23 to Rs1bn in Q1FY24 and analysts of IIFL Capital Services expect FCF generation of Rs6-8bn p.a. over FY24- 26. Maintain BUY with TP of Rs 3,150 (14% upside). 

JB’s India business has consistently outperformed IPM growth by 500-600bps p.a. over the past five years, as its big brands become bigger with its five-pillar brands growing 18-27% in FY23, while JB’s volume growth has been 7.7% Cagr over FY20-23 vs IPM volume growth of only 1.8% Cagr. Analysts of IIFL Capital Services believe its twice-the-market growth rate in chronic segment led by Cardiac therapy and robust execution in acquired portfolios will continue to drive its sustained 400-500bps outperformance in domestic market. Analysts of IIFL Capital Services forecast JB’s India sales to grow at 14% Cagr over FY23-26. 

Higher CMO sales and focus on SA private market will provide further impetus to margins: 

While JB’s CMO business clocked 60% growth in FY23 led by a prolonged cough and cold season across the world, mgmt is optimistic of driving consistent double-digit growth in the CMO segment led by increasing wallet share with existing customers and addition of new markets/clients/products. With the mgmt also repositioning its South Africa business more towards the private market, JB’s PBT margins in the SA subsidiary have improved from 6.7% in FY22 to 7.3% in FY23. 

Mgmt’s target to increase revenue contribution of the high-margin, high-RoCE India & CMO businesses to 75-80% in the near term vs 65% currently, would aid in generating FCF of Rs6-8bn p.a. over FY24-26, thereby translating into FCF yield of ~3.5%. With improvement in margins expected over the next 3 years led by India/CMO biz, analysts of IIFL Capital Services expect JB’s RoIC (post-tax) to again bounce back to 25-30% in FY25/26 from 18% in FY23.