Strong order book offers lifeline to Jubilant Life Sciences

Higher revenue growth, falling debt could boost valuation

Jubilant Life Sciences shed 6 per cent on the bourses after reporting muted June quarter results and valuation concerns following the recent rally. Prior to Monday’s correction, the stock had gained over 46 per cent in three months.

Immediate triggers for the slide were the disruption on account of Covid-19, suspension in operations, and the weak showing in key segments. Overall sales were down 13 per cent due to weakness in the pharma and life science ingredient (LSI) businesses. Within the pharma segment, which accounts for 58 per cent of sales, suspension of operations at the Nanjangud plant for two months (contract development and manufacturing or CDMO) and weak specialty pharma performance owing to the delay in elective procedures and patient footfall, caused the overall dip.

However, resumption in operations at the plant, improving demand, and a robust order book should help the CDMO business post better growth rates hereon. The firm has also entered into commercial supply arrangements for vaccine candidates that could lead to incremental revenue potential of up to ~250 crore.

In addition to CDMO, what could drive sales within the pharma business are the radiopharma and allergy segments. Analysts at Motilal Oswal Research say new product introduction, better volumes, and favourable prices will drive revenues for the segments. They expect the pharma business to grow to ~6,000 crore over the FY20-22 period, growing at 3 per cent annually.

In the LSI segment, barring the rest of the world, sales performance in the domestic and developed markets was down 5-15 per cent.

This was on account of weak demand and falling acetic acid prices. The firm has, however, guided for double-digit revenue growth in the LSI business in FY21, with recovery expected in the September quarter on the back of improving demand and stability in acetic acid prices. Another trigger was the reduction in debt by ~350 crore over the last quarter, to just under ~3,000 crore.

Analysts at JM Financial say the improvement in balance sheet position, expected recovery in earnings from the current quarter, and unlocking of value following the reorganisation (demerger) in business should result in bridging of the valuation gap vis-à-vis peers. The stock is trading at close to 10x its FY22 earnings estimates.