Q2FY24 Review: JB Chemicals & Pharma: Margins tracking ahead of expectations

9 Nov 2023 , 11:01 AM

JB Pharma’s Q2 Ebitda margins (ex-ESOP) at 28.5% were ~200bps ahead of analysts of IIFL Capital Services estimates, driven by chronic-led growth in the India business and rationalization of low-margin export businesses (e.g. SA tender business). With mid-to-high teens growth in the chronic business and high-single-digit growth in the acute business, analysts of IIFL Capital Services believe JB will continue to outperform IPM growth by 300-400bps and expect its India business to clock 14% Cagr over FY23-26. While mgmt now expects FY24 Ebitda margins to be at the higher end of the guided range of 25-27% (27.8% margins in H1FY24), analysts of IIFL Capital Services believe margins will potentially improve to 29% in FY26 driven by higher chronic revenue share in the India business, mid-teens growth expected in the CMO business, and potential rationalization of the low-margin Russia business as well at some point in time. They upgrade FY24-26 Ebitda by 2% led by higher margins and forecast 20% Ebitda Cagr over FY23-26. JB (TP Rs1670) remains one of analysts of IIFL Capital Services preferred picks along with Mankind and Alkem. 

Chronic business will drive 12-14% growth in the India business: 

JB’s India business grew 11% YoY in Q2 (14% in H1), driven by 14% growth in the chronic business and 5-7% growth in the acute brands. Although weak acute season affected Rantac and Metrogyl’s growth in Q2, execution in the chronic therapy continues to remain strong with JB’s chronic business growing 18% in H1 vs IPM chronic growth of 10%. JB’s Cilacar franchise has clocked 22% Cagr over the past two years and JB has also maintained 17-18% MS in Azmarda as price erosion has been offset by volume growth. 

Mgmt has reiterated its target of increasing the revenue share of the high-margin India & CMO business from 68% currently to 75-80% over the next 3 years. Analysts of IIFL Capital Services believe this will be partly dependent on further M&A opportunities in the domestic market. For the CMO business, JB has expanded its packaging lines capacities and has also acquired a land parcel (for Rs500m) to meet growth aspirations beyond the next 2-3 years, given mgmt is targeting to scale-up the CMO biz from USD55m to USD100m in few years. 

India, CMO and rationalization of low-margin export segments will continue to drive margin expansion and analysts of IIFL Capital Services see an upside risk to their 29% Ebitda margin (ex-ESOP) estimate for FY26. Exports business, excluding Rs1.2bn of discontinued South-Africa tender sales, is expected to continue to grow in double-digits (16% growth in H1FY24). Largely net cash BS and FCF of Rs7-8bn p.a. also provides ammunition for India M&A.