J.B. Chemicals & Pharmaceuticals Ltd Research Report By IndiaNivesh

Lower material costs coupled with double digit growth in DF lead to modest top line growth & margin expansion. Stock on the cusp of rerating on back of US business

JB Chemicals and Pharmaceuticals (JBCP IN) delivered 8% yoy growth in sales in Q1FY17 marginally lower than our expectation. However DF recorded growth of 12.5% Y-y which is by far the best in the industry & much ahead of peers which recorded low single digit growth due to concerns on pricing, NELM & FDC ban. Sales remain impacted by emerging markets although even in those markets JBCL managed to record marginal growth despite challenging environment. Due to lower raw material costs, gross margin expanded to 61.7% v/s 57.36% in Q1FY16. Ebitda margin expanded 413 bps. On back of significantly lower interest outgo & higher other income, adj net profit increased by 39% to reach Rs 511 mn.

This is second consecutive quarter of margin expansion with EBITDA margin firmly moving to 20% range from 16% range in previous years. Despite challenging environment on export markets JBCL has been maintaining marginal growth implying the strength of its product portfolio. We believe in near future as currency related issues in many of the EMs recede, JBCL will be back on better growth trajectory. Meantime the company has been steadily moving strengthening its DF franchisee as well as developing a few products for US markets. We believe the efforts on US front should start yielding results in next 1-2 quarters. Visibility on US shall be next trigger for stock re-rating. We remain positive on JBCL & maintain buy rating on the stock with upward revised target price of Rs 413 (15xFY18E EPS, unchanged). At CMP of Rs 337, the stock is trading at attractive valuation of 13.3x FY17E EPS of Rs25.3 & 12.2.x FY18E EPS of Rs 27.50.