Rakesh Jhunjhunwala grills top brass of Jubilant Life Sciences
The first indication that Rakesh Jhunjhunwala, the Badshah of Dalal Street, is interested in Jubilant Life came when he stormed into the press conference that the Company was having.
The Badshah had come prepared with a long list of questions, which made it clear that he had meticulously studied the accounts and was familiar with their nitty-gritty.
We know from past experience that the Badshah’s presence at investors’ meets is a sure-fire indication of his interest in the stock and that the stock is destined to become a multibagger.
Aurubindo Pharma is a prime example of this. The stock became a magnificent 8-bagger after Rakesh Jhunjhunwala grilled the management and bought the stock.
Aggressive ramp up by distinguished shareholders
Rakesh Jhunjhunwala is obviously the cynosure of all eyes with a holding of 20,00,000 shares of Jubilant Life as of 30th June 2017. The investment is worth Rs. 148 crore at the CMP of Rs. 740.
However, it is noteworthy that several other distinguished shareholders have also been aggressively increasing their stake in the Company.
Raamdeo Agrawal’s Motilal Oswal Mutual Fund has been buying the stock at every opportunity.
It made its debut in the December 2016 quarter with a holding of 35,09,560 shares. Today, it lords over a mammoth 59,52,637 shares, which is nearly three time Rakesh Jhunjhunwala’s holding.
Morgan Stanley Asia (Singapore) Pte has also increased its stake from 20,08,554 shares in December 2016 to 26,86,621 shares in June 2017.
Daljeet Kohli recommended the stock in 2015
Daljeet Kohli was the first discoverer of the potential of Jubilant Life Sciences.
He recommended the stock in July/ August 2015 when it was languishing at Rs. 250.
“It is trading at 8 times of EV to EBITDA. Their Roorkey facility which is the generics business is doing very well. Yesterday they got an approval for one of the drugs, which is anti-depressant and that is again USD 100 million kind of drug and there are 32 pending approvals. So the kind of approvals that are coming will keep good momentum in this stock in next one to one and a half years,” Daljeet said in his typical soft-spoken voice.
Daljeet’s words were prophetic because the stock has surged to Rs. 750, putting gains of 171% into his portfolio.
Daljeet Kohli pegs target price of Jubilant Life at Rs 922
Daljeet has issued a research report in which he has projected a target price of Rs. 922 for the stock.
The logic is quite sound:
“Life science ingredient segment (50% of total sales) – better margins in this segment to drive profitability of this segment
– JOL is witnessing trend reversal in this business from de‐growth & falling realization in last few years to increase in demand as well as prices. JOL has taken price hike of around 15% from January 2017 in some of the products in this segment. This price hike is outcome of better market conditions & not the increase in input prices. We expect JOL to sustain sales and profitability in this segment
– JOL has net debt of Rs37.4bn at the end of Q3FY17. This is Rs 550 mn lower than net debt at end of Q2FY17. JOL has taken many measures to reduce the cost of debt by refinancing means. Blended cost of debt has come down by 120 bps from Q3FY17 onwards to 6.3%. The management has been focusing on reduction of debt through internal accruals. We believe consistent debt reduction may become a re-rating trigger for the stock.”
Porinju Veliyath explains why Jubilant Life is a great buy
Porinju homed in on Jubilant Life in June 2016 when the stock was available at Rs. 350.
He confidently declared that the stock is at an “inflection point” and gave three reasons why it is a must buy for our portfolios:
(i) 55 percent of its business is very high quality pharmaceutical business. It is very strong in the “nuclear medicines” which is a niche business and is becoming a global leader in some segments;
(ii) It is a large company with revenue close to USD 1 billion and market cap below USD 1 billion. It has debt of Rs 4,000 crore. So, at an enterprise value of Rs 9,000 crore, one can buy a company worth USD 1 Billion with the potential for strong growth;
(iii) The management is committed to reducing the debt levels. Every year, the debt is coming down by Rs 300-400 crore of debt.
Porinju reiterated his pet point that novice investors have to go beyond “number crunching” and mix it with a bit of “common sense” if they want to snare multibaggers.
Porinju pockets 100% gain and sells stock
Porinju made the surprising statement in May 2017 that there is no more “excitement” left in Jubilant Life Sciences and that he has sold it off.
His precise words are as follows:
“Q. We have a question from Rishabh Vinayaka. He’s asking for your views on Jubilant Life Sciences?
A. We sold off. We booked profit. It doubled in 4-5 months after we bought it last year. I think the price is near all-time highs now so I don’t find it exciting. I look at stocks only when there is excitement. If somebody says a stock will go up by 20-30 percent I’d rather keep my money in a fixed deposit.”
Prima facie, it appears that Porinju may have to reconsider his stance because Rakesh Jhunjhunwala’s interest in the stock implies that mega bucks can still be harvested from it.
Will Jubilant Life replicate the success of Lupin & Aurobindo Pharma?
Rakesh Jhunjhunwala cites Lupin as an example of how, when you spot a goldmine stock, you must buy first and think later.
He explained how, a few years ago, Lupin was languishing at a throwaway valuation of only Rs 200 crore even though it was the single filer of a product called “injectable Cephalospor” with a potential of sales of USD 360 million.
Lupin was also the only approved FDA plant in Asia.
The Badshah did not hesitate for even a second. He bought a gigantic oil tanker-load of 7,793,105 shares in the blink of an eyelid.
The market capitalisation of Lupin has since then surged from Rs. 200 crore to Rs. 85,000 crore (presently Rs. 52,000 crore), and has contributed in a major way to Rakesh Jhunjhunwala’s designation as a 2x Forbes Billionaire.
The same thing happened in Aurobindo Pharma. In June 2013, the Badshah was spotted by the sleuths of DNA at an investors’ meet grilling the management about some esoteric issues.
Later, in September 2013, he officially disclosed that “I have bought some Aurobindo Pharma. I am very bullish on it”.
The stock has surged 700% since then and is still looking good despite the doldrums that the entire Pharma sector is in.
“Such ridiculous valuations!!! … What is there to think? So those kind of situations are like invest now, investigate later” the Badshah exclaimed with a big chuckle.
|JUBILANT LIFE SCIENCES LTD – KEY FUNDAMENTALS|
|MARKET CAP||(Rs CR)||11,944|
|EPS – TTM||(Rs)||[*S]||5.05|
|LATEST DIVIDEND DATE||18 AUG 2016|
|BOOK VALUE / SHARE||(Rs)||[*S]||128.24|
[*C] Consolidated [*S] Standalone
|JUBILANT LIFE SCIENCES LTD – FINANCIAL RESULTS|
|PARTICULARS (Rs CR)||JUN 2017||JUN 2016||% CHG|
(Source: Business Standard)
Jubilant Life has “multiple triggers to drive earnings”: Motilal Oswal
Motilal Oswal, whose mutual fund is one of the major shareholders of Jubilant Life, has issued an initiating coverage report in which it has recommended a buy on the basis that the stock has “Multiple triggers in place to drive earnings”.
“Jubilant Life Sciences (JLS), part of Jubilant Bhartia Group, is an integrated pharmaceuticals and life sciences company engaged in the manufacture of radiopharmaceuticals, allergy products, generics, advance intermediates, nutritional products and life science chemicals. JLS also provides services in contract manufacturing and drug discovery solutions. JLS’ operations are spread across the world, including India, the US, Canada, Europe and other countries.
– All sub-segments in pharmaceuticals (52% of total sales) are well poised for growth, in our view. Compared to peers, JLS has a unique portfolio of specialty pharmaceuticals, which includes radiopharmaceuticals, allergy products and CMO. We expect the company’s differentiated products & distribution strategy and long-term contracts to lead to 18% CAGR (FY17- 20) in radiopharmaceuticals sales, while enhanced marketing efforts to improve productivity should lead to 20% CAGR (over FY17-20) in allergy products sales. High entry barriers for developing and manufacturing are expected to further improve profitability.
– JLS is also expected to perform well in the life science ingredients (LSI) segment (45% of total sales), driven by product launches and price hikes in key products. Post 4.2% compounded decline in revenues over FY14-17 due to product-specific issues, LSI is expected to post revenue CAGR (FY17-20) of 10.2% to INR36.2b.
– JLS has successfully cleared US FDA inspections at its various facilities in the past three years. Notably, it resolved warning letters at Spokane and Montreal within 12-15 months. While peers are faced with numerous regulatory headwinds, we believe JLS has minimal regulatory risks over the medium term.
– The company’s debt-reduction program (from internal accruals) remains on track. This is expected to reduce financial leverage from 1.1x in FY17 to 0.4x in FY20. This, along with lower-cost debt, is expected to improve the interest coverage ratio from 3.1x in FY17 to 6.6x by FY20. Overall, for JLS, we expect PAT CAGR (FY17-20) of 22.9%.
– We value JLS on an SOTP basis, assigning 11x EV/EBITDA to the Pharma business and 4.5x EV/EBITDA to the LSI business. We value the Pharma business at industry average, as the share of high-margin segments is increasing in the pharma portfolio. Accordingly, we initiate coverage on JLS with a Buy rating and a price target of INR905.”
Margin accretive businesses on faster track: ICICI Direct
ICICI-Direct is also bullish about the prospects of Jubilant Life Sciences. The core reasoning for the buy recommendation is as follows:
“Margin accretive businesses on faster track; maintain BUY
Q1 revenues were more or less in line while net profit was below expectation due to higher taxation. Going forward, we expect margins to improve through FY19 on the back of the tilt of product mix towards margin accretive businesses, especially Radiopharma. For Radiopharma, we expect contribution to pharma revenues to improve from 25% in FY17 to 31% in FY19E. On the LSI business front, we expect product rationalisation to continue. With an improved visibility led by improvement in product approvals and a better segment mix we expect a continuous improvement in free cash flow generation and focus on debt repayment. We have ascribed a target price of Rs 845 (SOTP basis) based on 1) 14x FY19E EPS of Rs 59 and 2) Rs 17 pre share valuation of the acquired pharmacy business.”
Pharma is an evergreen business, take advantage of weakness to buy: Sanjiv Bhasin
Sanjiv Bhasin, the veteran stock picker, is a strong believer in the prospects of the Pharma sector to deliver multibagger gains to investors.
“Pharma is an evergreen business, it is going through the weakness because right now the prices are in your favour and we know the circumstances which have forced that. But if you do not buy a basket then may be two can outperform or two can underperform, the idea is to make pharma your asset class for the next six months because this consolidation in the market can last right up till August September. Pharma can be a very good conduit for playing the market and with an uptick or any positive from FDA, there’s a possibility that almost 2200 patents will come on in the next six to nine months,” he advised.
Buy fundamentally strong businesses when they are not doing well: Kenneth Andrade
Kenneth Andrade also opined that Pharma stocks which are presently facing headwinds owing to the FDA crackdown and the appreciation of the rupee make for excellent contrarian buys.
“Look for an opportunity or look for a business which is not doing well, buy the guy who actually leads the entire business. You are probably getting it at a price point that you would never be able to buy it if that industry was doing well and that is our business,” he said in his typical mumble.
“Look at the market right now. The underperformers three years back are actually the outperformers right now. You do not necessarily have to make a business case for the guys who are outperforming the market to continue to grow because the risk that you are actually putting or bringing to the table is that the multiples are already high,” he added.
Pharma stocks are wonderful investment opportunities: Raamdeo Agrawal
Raamdeo Agrawal (whose mutual fund is aggressively buying Jubilant Life Sciences) is also very bullish about Pharma stocks.
“USFDA is a temporary problem. You must not read into anything in the sense that if the importance of size and importance of Indian pharma is growing, they also need to gear up to the required standards of the US,” he said.
“Indian generics have no global alternatives for the long term. I see a sign of maturity scaling up in Indian pharma. Most pharma companies can throw up wonderful opportunities for investors to buy these stocks 30-40 per cent cheaper if you have faith in them. The business opportunity is beyond doubt because the world needs generics,” he added.
Pharma stocks are a “lottery” with zero risk and high reward
Rakesh Jhunjhunwala has famously described Pharma stocks as an “absolute lottery” on the basis that the risks are minimal while the gains can be manifold.
“I am bullish on pharma… Indian pharma supplies 40 per cent of American generics and 7 per cent value …. If this 40 per cent becomes 50 per cent and we have to go up in the value chain, what is going to happen? We should understand that Indian costs are very low, Indian companies are getting size, Indian entrepreneurs have understood the market. Why will these companies not grow? The whole market is an absolute lottery,” the Badshah exclaimed, the excitement clearly evident in his tone and mannerisms.
Hike in stake of Aurobindo Pharma shows time is ripe to be contrarian
I have earlier meticulously drawn attention to the all the research reports which project Aurobindo Pharma in a rosy picture and recommend a buy on the premise that it will regain its old multibagger luster and glory once the FDA woes cease.
Rakesh Jhunjhuwala has endorsed this belief by increasing his stake in Aurobindo Pharma from 63,50,000 shares as of March 2017 to 65,50,000 shares as of June 2017.
The investment is worth Rs. 491 crore at the CMP of Rs. 750.
Conclusion – time to be contrarian
Rakesh Jhunjhunwala’s action of increasing his stake in Aurobindo Pharma, and buying a new stake in Jubilant Life Sciences, is sending the clear signal that in the present overheated market, we have to be safe and adopt a contrarian stance. It is advisable that we heed the advice and also tuck into top-quality Pharma stocks ASAP!