JB Chemicals is the preferred pick in the Pharma sector: Nirmal Bang

JB Chemicals – Company Update

We recently visited JB Chemicals and Pharmaceuticals Ltd’s (JB Chem) oral solid (T20) and Injectable (IV17) facilities at Panoli, Gujarat and interacted with the Operation and Production heads across all plants to understand the company’s manufacturing capacity and capability. While the T20 facility is USFDA approved and it is utilized for the US, South Africa (SA) and Indian markets, the IV17 facility is mainly for RoW markets. The company is also adding a separate Eye Drops line in the IV17 facility for the US market and is expected to start validation batches from April 2023. We like the company’s idea of having a uniform production policy and almost similar compliance standard across all geographies. About capacity, as per the management, the company has sufficient capacity and expansion space in the existing plants for at least the next five years of production requirement. On the Ranzel brand acquisition, we believe that the deal complements the company’s existing cardiac segment and the management believes that it is a strategic fit to enhance focus on the domestic market. The company will utilize its existing fieldforce to market these brands, but we expect that JB Chem will need to add more field strength to promote these brands. Hence, we believe that the deal would be margin-accretive but earning-neutral. JB Chem remains our preferred pick in the Pharma sector mainly due to its aggressive growth focus in the domestic market, strong financials and healthy FCF. We maintain a “BUY” recommendation on JB Chem with a revised target price (TP) of Rs2,427, valuing it at 20x Sept’24E EV/EBITDA.

Facilities Overview

▪ JB Chem has 7 formulations facilities and 1 API facility with most of the units approved by all major compliance agencies, including units TI10 (OSD), T20 (OSD) and D9 (API), which are USFDA compliant as well.

▪ T20 is an oral solid dosages unit with a 15mn p.a. tablet production capacity and has close to one-third capacity utilization. The company intends to double its capacity by the end of June’23. 40% of the volume from this facility is directed towards the US and SA markets each and the balance caters to the domestic market. The facility was constructed at an investment of ~Rs1.50bn in 2018.

▪ IV17 is an injectable unit, which caters to RoW (including Russia) markets and Domestic market and has 70-80% capacity utilization. JB Chem is in the process of adding a new line for manufacturing eye drops for the US market and it will likely start validation batches from April’23.

▪ TI10 is an oral solid dosage unit with 3 manufacturing lines. This facility largely caters to the US, Australia and SA markets and has 100% capacity utilization.

▪ L6 is a liquid dosage manufacturing unit and it is used for manufacturing Ayurvedic and Allopathy liquid dosages. There is some spare capacity and the same will be utilized for manufacturing Ayurvedic medicines.

▪ D9 is the company’s API facility and has 6 blocks. The unit is used to produce high-volume APIs such as Glipizide, Diclofenac, Atenolol etc. Most of the output is used for captive consumption.

▪ The Ankleshwar facility was recently inspected by Kenya and Uganda compliance agencies. It manufactures ~100-150mn tablets annually and the facility also has spare capacity which can further be expanded.

▪ Lozenges facility has ~55-60% utilization. JB Chem is globally among the top 5 players in the manufacturing of lozenges.

▪ The company has sufficient capacity and does not expect any greenfield expansion in the near term. Growth would be led by brownfield expansion by adding additional lines in the existing facilities.