J.B.Chemicals & Pharmaceuticals Ltd
In the Spotlight: Maximizing therapy dominance
JB Chemicals and Pharmaceuticals Ltd (JBCP) is a rapidly growing mid-sized pharmaceutical company in India, focusing on expanding its domestic presence through strategic acquisitions and CDMO business scaling up. In India, JBCP’s growth is accelerated by the market share gain and Rx increase in the acquired portfolio, successful lifecycle management of key brands, and increased contribution by domestic portfolio from 41.6% in FY18 to 54.4% in FY24. The recent Ophthalmology brands acquisition diversifies JBCP’s India revenue base and solidifies its leadership in this therapy. The company places emphasis on its high-margin domestic business(we expect at 30% margins) and CDMO operations(we expect at 35% margins). In CDMO, 80% of revenue comes from Lozenges. JBCP is recognized as the preferred partner for leading MNCs and consumer healthcare companies globally in the field of Lozenges. By leveraging its strong presence in domestic markets and dedication to seizing emerging opportunities, along with strategic restructuring in the exports segment, JBCP is well-positioned to capitalize on immediate growth opportunities. We expect 25% EPS CAGR over FY24-26E aided by 1) Strong growth from domestic business (CAGR of 17% FY24-FY26E), 2) 32% growth over FY24-FY26E from new acquisitions, 3) scaling up of high margin CDMO business on the back of new therapy launches and 4) robust FCF generation. We assign a 24x EV/EBITDA on FY26E EBITDA (implied PE of 35x on FY26E EPS of Rs 56), arrive at a target price of Rs. 1,987 per share with a BUY rating on the stock.
The domestic business is primed for growth- JBCP has consistently outperformed the Indian Pharmaceutical Market (IPM) by growing at 5-year CAGR of 23% as compared to the IPM’s growth rate of 10%. This was mainly driven by higher contribution from chronic therapies (51% of domestic revenue), acquisition of new products and line-extensions through life cycle management. The company has therapy dominance in Cardio and Gastro, which is a high margin business and contributes ~60% to the domestic revenue. The company’s emphasis on expanding its brand portfolio within existing therapies, rather than venturing into new ones, has significantly bolstered revenue growth for flagship brands. The Company’s biggest brand Cilacar franchise had sales of more than Rs. 6 Bn in FY24 (18% of sales). Going ahead, we expect domestic business (ex-Ophthal) to grow at a CAGR of 14% from FY24-FY26E on the back of increased volume growth aided by price hike.
Diversifying the domestic portfolio- JBCP’s India business is currently concentrated in four primary therapeutic areas such as cardiac (41%), gastro (27%), antibiotic (8%) and Ophthal (8%). The top five brands: Cilacar, Cilacar-T, Metrogyl, Nicardia, and Rantac contributes ~65% to the domestic revenue. In a strategic move to broaden its revenue streams, the company has undertaken bolt-on acquisitions in Probiotics, Pediatrics, Statins, and Ophthalmology. Notably, the key brands from these acquisitions are already making significant strides in their respective markets. Through these strategic acquisitions, JBCP aims to diversify its product portfolio. The contribution of top 5 brands is declining from 75% FY22 to 60% in FY26E, thus de-risking the domestic portfolio.
CDMO business to double in next 5 years- JBCP is amongst the top 5 player in the world for medicated and herbal lozenges. The CDMO business which contributes 12% to the total revenue has grown at CAGR of 17% over FY19-FY24 and has experienced 60% YoY growth in FY23 due to increased demand from existing customers. The company has a capacity to manufacture 2 Bn lozenges annually and is running at a utilization level of 55%. Due to healthy order book, new MNC clients, expansion into new geographies (ROW market), introducing new therapy lozenges and higher available capacities, CDMO business is poised to grow at a CAGR of 15% from FY24-FY26E and the revenues are expected to double from USD 50 Mn to USD 100 Mn in next five years.
Initiatives for margin expansion and robust FCF generation- Over time, JBCP’s high-margin domestic and CDMO segments have been experiencing improved growth. In FY24, the company’s overall margins significantly improved to 25.7% from 22.1% in FY23, led by 1) cost optimization efforts, 2) favourable product mix, and 3) stabilized logistics and trade costs. With sufficient capacity for its projects, JBCP is well-positioned for future business growth. We anticipate JBCP’s annual capex ranges between Rs 0.8bn to Rs 1bn. Despite acquisitions, JBCP maintains its cash-rich balance sheet and remains a net cash company driven by robust cash generation. This strong financial position enables JBCP to pursue growth opportunities through strategic acquisitions.
Valuation is reassuring! Currently, the stock is trading at a reassuring valuation on EV/EBITDA of 20x and PE of 30x. Considering JBCP’s strong position in the domestic market, expansion into the Ophthalmic segment, scaling up of high-margin CDMO business, and robust free cash flow generation (~Rs.21.6bn over FY26E), we assign a 24x EV/EBITDA (implied PE of 35x) on FY26E EBITDA and set a target price of Rs. 1,987 per share with a BUY rating on the stock, offering a 19% upside from current valuations.
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