Q1FY24 Review: JB Chemicals & Pharma: India & CMO biz to sustain mid-teen growth

11 Aug 2023 , 02:57 PM

JB Pharma’s execution in the high-margin India and CMO businesses continues to remain strong with both these businesses growing 17-19% YoY in Q1, thereby driving 11% beat on Ebitda vs analysts of IIFL Capital Services estimates. JB’s twice the market growth in the Chronic segment led by Cardiac therapy and robust execution in acquired portfolios of Sanzyme, Azmarda & Razel will drive company’s sustained 300- 400bps outperformance in the domestic market. Order book for the CMO business also remains healthy, with mgmt targeting double digit growth in this segment over the medium term, driven by addition of new geographies, lifecycle management of lozenges brands, and potential addition of new clients. Analysts of IIFL Capital Services expect JB’s India and CMO businesses to clock 14% Cagr over FY23-26 and with sustained mid-teens growth in these segments, they upgrade FY24- 26 EPS by 3-5% and forecast 25% EPS Cagr over next 3 years. Maintain BUY. Their TP of Rs3,150 (16% upside) is based on ~29x 2YF EPS, at 17-18% discount to their target valuations for Mankind. 

India outperformance to continue led by Chronic: 

JB’s India growth of 17% YoY in Q1 was driven by high-single-digit volume growth, price increases of 5-6%, and new launches of 2-3%. With JB’s chronic portfolio consistently growing at high-teens (23% in Q1 vs IPM Chronic growth of 10%), mgmt has reiterated its target of increasing Chronic revenue share from 54% currently to 60% over the next few years. Execution in acquired portfolio has also been robust, with Azmarda maintaining 16-18% value MS and Razel’s monthly sales increasing >20% vs pre-acquisition levels. 

Higher CMO sales & lower SA tender business will also help to expand margins: 

The order book for the CMO business remains healthy for Q2, but demand in 2H will be dependent on the season. Nonetheless with only 60% capacity utilisation in CMO and plans to add newer lozenges products, mgmt is hopeful of driving consistent double-digit growth in this segment. Repositioning of the SA business to private market, along with mid-teen growth in India & CMO, should enable JB to expand GMs by 50-100bps p.a. analysts of IIFL Capital Services expect operating Ebitda margins of 27-28% over FY24-26. 

Cash generation remains strong: 

Despite incurring Rs13bn of acquisition-related spends over the past 2 years, JB’s inherent strength of the branded generic franchise is reflected in the company’s strong cash generation, as net debt has further reduced from Rs2.6bn to Rs1bn in Q1. FCF generation will remain strong at Rs6-8bn p.a. over the next 3 years.