8 February 2012 3QFY12 Results Update | Sector: Healthcare

Jubilant Lifesciences
BSE SENSEX S&P CNX

17,622 Bloomberg Equity Shares (m) 52-Week Range (INR) 1,6,12 Rel. Perf. (%) M.Cap. (INR b) M.Cap. (USD b)

5,335 JOL IN 159.3 227/148 -8/-13/-11 28.5 0.6

CMP: INR179

TP: INR199

Neutral

Jubilant Organosys 3QFY12 performance was below our estimates  Sales were up 25.5% YoY to INR10.87b (v/s est INR10.67b), EBITDA was up 60% YoY to INR2.07b (v/s est INR2.22b) while EBITDA margins stood at 19% (v/s est of 20.8%). The company reported net loss of INR784m (v/s est PAT of INR479m) mainly due to INR1.55b forex losses.  Life Sciences Products business grew 24% YoY led by both volume growth and improved pricing while Life Science Services business grew a strong 32% YoY mainly led by 37% YoY growth in CMO business.  EBITDA grew 60% YoY to INR2.1b, but was below our estimates. EBITDA growth was led by services business. EBITDA margin expanded by 400bp to 19% (v/s est 20.8%). The margin improvement in services business was led by improved product mix, increased capacity utilization and cost control measures.  Despite strong EBITDA growth, JOL reported net loss of INR784m due to INR1.55b of MTM forex losses and unrealized exchange loss amortization on long term foreign currency loans and doubling of interest cost. Over FY11-13E, we expect JOL to record topline CAGR of 18.5%, EBITDA CAGR of 37% on a low base and a 40.5% EPS CAGR (again on a low base). While topline growth will be mainly led by a 43% CAGR in Generics business, EBITDA growth will be mainly driven by normalization of EBITDA margin to 20.3% compared to the significantly lower margins of 15.2% recorded in FY11. EPS CAGR at 40.5% will be only marginally better than EBITDA growth as high forex gains get tempered by increased tax rate and higher minority interest. We believe JOL needs to restructure its balance sheet significantly for the stock to be re-rated. Currently it has net debt of INR36.85b to support an overall topline of INR41.6b. High debt continues to be our main concern area for JOL. High debt and low RoCE (FY13 RoCE will be ~14%) remain an overhang. Based on our revised estimates, the stock trades at 16x FY12E EPS and 6.2x FY13E EPS. We maintain Neutral with target price of INR199 (7x FY13E EPS).

Nimish Desai (NimishDesai@MotilalOswal.com); Tel: +91 22 39825406 Amit Shah (Amit.Shah@MotilalOswal.com); Tel: +91 22 3982 5423

7 78. EBITDA growth was led by services business. Drug Discovery and Development Services (DDDS) business grew 22% YoY to INR590m led by robust growth in chemistry services. The company reported net loss of INR784m (v/s est PAT of INR479m) mainly due to INR1.150 490 27 1667 8.667 % YoY 12.9 1.22b) while EBITDA margins stood at 19% (v/s est of 20.Jubilant Lifesciences Topline led by product business while EBITDA led by services business Sales were up 25.4) 4.1 32.560 2. EBITDA Margin Trend Source: Company 8 February 2012 2 . Life Sciences Products business grew 24% YoY led by both volume growth and improved pricing.5 20. but was below our estimates.3 2.410 8330 1.110 8670 1. Life Science Services business grew a strong 32% YoY mainly led by 37% YoY growth in CMO business to INR1.570 590 40 2200 10.55b forex losses.540 580 30 2150 % QoQ 10.920 2.3 10.1 1. increased capacity utilization and cost control measures.8 (12.480 3.87b (v/s est INR10.870 3QFY11 5.8 23. EBITDA margin expanded by 400bp to 19% (v/s est 20.820 1.67b).0 25.8%). The margin improvement in services business was led by improved product mix.4 2QFY12 5.5% YoY to INR10.7 Source: Company EBITDA grew by 60% YoY to INR2. Sales Mix (INR M) 3QFY12 Life Science Ingredients Generics Life Science Products CMO DDDS Others Life Science Services Total 6.4 48.7 33.1b. EBITDA was up 60% YoY to INR2.57b on account of the company’s strategic initiatives.180 7000 1.8%).1b below our estimates EBITDA grew 60% YoY to INR2.07b (v/s est INR2. Life Science Ingredients business grew 13% YoY while generics business grew 78% YoY led by volume growth across geographies and favorable pricing in solid dosage formulations business segment.9 36.

Management also indicated that the margin improvement will sustain in the coming quarters. better capacity utilization.5b). We believe the debt level is unlikely to reduce during FY12/ 13 given high working capital requirement led by strong topline growth expectation and large capex at INR5b for FY12E and INR3b for FY13E.8% to factor in the lower than expected margin recorded in 3QFY12.85b. new launches.55b of MTM forex losses and unrealized exchange loss amortization on long term foreign currency loans and doubling of interest cost due to increase in debt. management has said that it has witnessed stable pricing in 9MFY12 expect for the Niacin business which is currently facing pricing pressure (although this is currently a small portion of the overall business). Interest cost to double in FY12 The debt on JOL’s books stand at INR36. new product launches. 8 February 2012 3 .1 represents a significant cut mainly due to the large forex losses recorded in 3QFY12 while it also takes in to account the increase in tax guidance and minority interest. up INR2. despite a large part of debt in foreign currency loans which have lower interest cost.e. USD revenues less all USD costs) has been recently hedged at INR53/USD. Management has guided for overall FY12 EBITDA margin of 20-21%. Forex hedge at INR53: While the company has not disclosed the quantum of forex hedges. JOL is witnessing the benefits of improved prices.3%) led by hedges taken at favourable rates (INR53/USD). Our new EPS estimate at INR11.48b QoQ. The management expects EBITDA margins to improve in FY13 (9MFY12 EBITDA margins were ~20. JOL reported net loss of INR784m due to INR1. The management said that the company has cut down on low margin clinical services business which has led to margin improvement. Overall interest cost for FY12 will double to INR2. High debt on the books remains concern. The company is expecting growth momentum to sustain across business segments led by new capacity commissioning. The increase is mainly due to restatement of forex loans to current exchange rate. Life Science Services business reported better performance during the quarter led by change in product mix. 9MFY12 pricing stable: Unlike in FY11 wherein the company had faced pricing pressure in product business. it has indicated that a major portion of its net exposure for FY13 (i. Management has indicated that every 1% change in INR-USD rate results in about INR120-150m change in net exposure. we have reduced our EBITDA margin estimate by 90bp to 19.85b. For some of its products. As of 31-Dec-11. Key Highlights of the conference call        EBITDA margin is down QoQ despite a favorable currency due to adverse productmix. Generics: The company has a pipeline of 25 ANDAs pending approval in the US. The company had raised debt in 4QFY11 for redemption of FCCBs worth USD142m (USD202m incl YTM) which was due for redemption in May 2011. JOL had net debt of INR36. Revising estimates FY12 – While our topline estimates remain unchanged.12b (9MFY12 interest cost is up 200% to INR1. change in product mix and higher capacity utilization in services business. 5 dossiers pending approval in Europe and 4 in Canada. vertical integration and foray into new geographies.Jubilant Lifesciences Despite strong EBITDA growth.

EBITDA growth will be mainly driven by normalization of EBITDA margin to 20.5%. Currently it has net debt of INR36. We also believe some of its past acquisitions (like Draxis) have been made at expensive valuations.5% EPS CAGR (again on a low base).3% compared to the significantly lower margins of 15. Outlook and valuation Over FY11-13E.85b to support an overall topline of INR41. High debt continues to be our main concern area for JOL. we expect JOL to record topline CAGR of 18. 8 February 2012 4 . While topline growth will be mainly led by a 43% CAGR in Generics business.Jubilant Lifesciences FY13 – Our EPS estimates are upgraded by 1. the stock trades at 16x FY12E EPS and 6.6b.2x FY13E EPS.6% as the benefit of significant reversal of forex losses is tempered by higher tax rate and minority interest. We believe JOL needs to restructure its balance sheet significantly for the stock to be re-rated. EPS CAGR at 40. We maintain Neutral with target price of INR199 (7x FY13E EPS).5% will be only marginally better than EBITDA growth as high forex gains get tempered by increased tax rate and higher minority interest. EBITDA CAGR of 37% on a low base and a 40. resulting in extended payback periods and lower return ratios.2% recorded in FY11. High debt and low RoCE (FY13 RoCE will be ~14%) remain an overhang. Based on our revised estimates.

4 1.5 1.6 20.8 9. Neutral Stock performance (1 year) 250 Jubi l ant Li fe Sens ex .4 Divis 22.2 3.9 2.1 28. driven by CRAMS. we expect JOL to record topline CAGR of 18.5 0.1 6.1 28.  Growing share of the profitable Pharma business.4 28.  Based on our revised estimates.9 Variation (%) -42.  Comparative valuations P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Jubilant 16.8 FY12 FY13 Target price and recommendation Current Price (INR) 179 Target Price (INR) 199 Upside (%) 11.5 1.8 20.2 5. Recent developments  Jubilant and Eli Lilly have extended Drug Discovery collaboration on successful delivery of Pre-clinical candidates.1 17.9 4. the stock trades at 16x FY12E EPS and 6.4 25.4 5.5%.Jubilant Lifesciences Jubilant Lifesciences: an investment profile Company description Jubilant Organosys Limited is the largest specialty chemicals company in India with high degree of vertical integration along with global scale and reach in almost all its key products.5% EPS CAGR (again on a low base).9 28.2 Reco.  High debt continues to be our main concern area for JOL. High debt and low RoCE (FY13 RoCE will be ~14%) remain an overhang. Key investment risks Hi debt on the books is a concern which may impact the profitability going forward  Adverse foreign currency movement can impact the revenue and profitability of the company.  Sector view  The CRAMS segment is likely to witness exponential growth over the next few years.2 0.2 17.8 Sep-11 48. Valuation and view Over FY11-13E.5 4.4 1. Its business model thus spans pharmaceuticals & life sciences.3 7.8 13. It has forayed into API business (by acquiring Max India’s API operations) and into formulations and regulatory services (by acquiring PSI n.0 1.2 1.2xFY13E EPS.7 EPS: MOSL forecast v/s consensus (INR) MOSL Forecast 11.4 Dec-10 47.Reba s ed Shareholding pattern (%) Dec-11 Promoter Domestic Inst Foreign Others 8 February 2012 49.7 Dishman 6. We maintain Neutral with price target of INR199 (7x FY13E EPS). with global scale capacities in key products and widespread global presence puts Jubilant on the high growth path. steriles & radiopharmaceuticals business.1 7.  Key investment arguments A composite and integrated player with offerings across the pharma and specialty chemicals value chain  Continuous forward integration.8 20. EBITDA CAGR of 37% on a low base and a 40. to ensure improved profitability and earnings visibility.3 1.v and PSI supply). industrial chemicals and performance chemicals.2 220 190 160 130 Feb-11 May-11 Aug-11 Nov-11 Feb-12 5 .1 6.5 Consensus Forecast 19.8 6.

Jubilant Lifesciences Financials and Valuation 8 February 2012 6 .

Jubilant Lifesciences N O T E S 8 February 2012 7 .

public appearances and trading securities held by a research analyst account. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The research analysts. Marco Polo Securities Inc. Broking relationship with company covered 4. and non-infringement.S. stock picking. Hoechst House. and no part of the compensation of the research analyst(s) was. MOSt has incorporated a Disclosure of Interest Statement in this document. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. is prohibited. MOSt and/or its affiliates and/or employees may have interests/positions. Investment Banking relationship with company covered Jubilant Lifesciences No No No No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues. where such distribution. Such research analyst may not be associated persons of the U. regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. at any time. rules. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA.S. This report is intended for distribution to institutional investors.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U. publication. MOSt is not a registered broker-dealer in the United States (U. strategists. compliance.S.S. MOSt and/or its affiliates are under no obligation to update the information. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state. While we would endeavour to update the information herein on reasonable basis. registered broker-dealer. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. however.. expenses that may be suffered by the person accessing this information due to any errors and delays. competitive factors and firm revenues. invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. Motilal Oswal Securities Ltd 3rd Floor. fitness for a particular purpose. MOSt or any of its affiliates or employees do not provide.K. country or any jurisdiction. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research report does not constitute an offer. or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors. not be treated as endorsement of the views expressed in the report. registered broker-dealer. regarding any matter pertaining to this report. costs. Nariman Point. financial or otherwise in the securities mentioned in this report. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . including without limitation the implied warranties of merchantability. investor client feedback.S. This document must not be acted on or relied on by persons who are not major institutional investors.S. For U. Analyst ownership of the stock 2. For U. dissemination or copying (either whole or partial) of this information. may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company. Unauthorized disclosure. Motilal Oswal has entered into a chaperoning agreement with a U. The recipients of this report should rely on their own investigations. Group/Directors ownership of the stock 3. any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses. Securities Exchange Act of 1934. is not subject to U. damages. This document must not be acted on or relied on by persons who are not investment professionals. ("Marco Polo"). Mumbai 400 021 Phone: (91-22) 39825500 Fax: (91-22) 22885038. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from. including quality of research. therefore.S. any express or implied warranty of any kind.com . This should. Also there may be regulatory. legal or taxation advice to you. To enhance transparency. as amended (the "Exchange Act") and interpretations thereof by the U. In reliance on the exemption from registration provided by Rule 15a-6 of the U. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). Marco Polo and therefore. Disclosure of Interest Statement 1. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals").) and. The information contained herein is based on publicly available data or other sources believed to be reliable. or other reasons that may prevent MOSt and/or its affiliates from doing so. is. E-mail: reports@motilaloswal.Disclosures This report is for personal information of the authorized recipient and does not construe to be any investment. use. availability or use would be contrary to law. or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.