India’s growing CRAMS pie a cause of joy for Jubilant

The Indian pharmaceutical industry is witnessing lot of interest with huge opportunities in the global contract manufacturing and generic space for supply of low-cost, off patent drugs.

Jubilant Organosys Ltd, the largest custom research and manufacturing services (CRAMS) company in India, would benefit from the country’s growing market share in low-cost outsourcing.

Business: 

Jubilant Organosys Ltd is an integrated pharmaceutical industry player with a wide presence across the value chain for providing products and services.

The company operates in two segments — pharma and life sciences products and services (PLSPS), and agri and performance products (APP).

The company, under its PLSPS segment offers proprietary products, exclusive synthetics, active pharmaceutical ingredients, generic dosage forms, life science chemicals, nutrition ingredients apart from providing services in drug discovery and development, medical chemistry and the clinical research space.

Jubilant also engages in contract manufacturing of sterile and non-sterile injectables and radiopharmaceutical products. This segment contributes to majority of the company revenues (89% in FY10) and overall operating profits (98% contribution). The company also derives higher Ebidta margins (26%) from this segment as proprietary products, API and life science chemicals offer better returns.

Under its APP segment, which contributes the rest of revenues, the company produces animal nutrition, agricultural products like fertilizers and agrochemicals and specialty polymers used in various industries. 

Jubilant Organosys, along with its subsidiaries, has its manufacturing operations in India and North America. While domestic market contributes 35% of its overall revenues, the company derives rest from international operations in US (37%), Europe (11%), China (10%) and other markets (7%).

Investment rationale:
The domestic pharma industry is expected to grow at 12-14% on account growing healthcare awareness, rising penetration in the semi-urban and rural markets, and a changing disease profile. Global MNCs are tapping domestic pharma companies for getting drugs at lower cost as several products go off-patent and thereby the need to compete against generic players. This increased outsourcing would mean more business for companies like Jubilant.

The company has a strong order book of $1 billion in the CRAMS business. It has a total of 64 products in the CRAMS pipeline. Revenues from generics grew 34% in FY10 to Rs 152 crore and this provides a great upside in the coming years.

Jubilant has filed 58 ANDAs/dossiers in the generics segment of which 35 have been approved. The company further plans to start commercial production of its three new radio pharmaceutical products by 2012-15.

Capacity expansion would further add to the topline. The company has planned capital expenditure of around Rs 400 crore for 2010-11 and Rs 350 crore for the next fiscal. This would be primarily utilised for its CRAMS business for increasing the capacity of pyridines and APIs, and for de-bottlenecking of life sciences chemicals.

Jubilant is betting on improved operating margins in its drug discovery and development services as it has already signed contracts and collaborations with leading pharmaceuticals and research institutions.  Also, the proposed de-merger of its APP business would better its return ratios as the company derives considerably higher margins from its PLSPS segment.

The company recently repaid FCCBs worth $50 million along with repayment of high-cost debt of Rs 500 crore, thereby helping to lower its interest burden.

The management also expects their effective tax rate to reduce to 13-14% in FY11 from 18.5% currently, thereby increasing the profit after tax. This would be on account of setting up SEZ plant and reorganising the businesses of subsidiary companies in US and Canada to derive tax efficiency.

Concerns:
The company has a significant amount of FCCBs outstanding due for redemption in May 2011, which may pressure the balance sheet, but Jubilant now seems to be in a position to raise low-cost funds to redeem the same.

Any delays in setting up the SEZ plant and capacity expansion would affect revenues. Further, since CRAMS is the major business, any major contracts lost on account of a global slowdown would impact its revenues.

Valuations:
Revenues are expected to be driven by its strong order book position, increasing capacity utilizations in its contract manufacturing operations business and commissioning of additional capacities in the coming years.

Better product mix with higher margins on drug discovery and development services, demerger of APP segment and lower tax rates once the SEZ comes though would lead to growth in net profits. Jubilant’s revenues are expected to grow at CAGR of 13% over FY10-FY12 and net profits at a CAGR of 18% over the same period. At a current market price of Rs 338.90, the stock is trading at 10.94 times and 9.14 times its FY11 and FY12 earnings, respectively. Investors with a medium to long-term view can consider the stock at current levels.

Disclaimer: The writer does not hold any share in the company.