JBCPL stock suffers drastic dip post J&J deal; co to grow other biz with sale proceeds

Mumbai-based JB Chemicals and Pharmaceuticals, or JBCPL, a small-sized pharma company suffered heavily on Tuesday on account of sale of its over-the-counter products to Johnson & Johnson. The company’s stock is now 32% down from its month-ago high of Rs 185. The company has sold the worldwide rights of three brands — Doktor Mom, Rinza and Fitovit. Doktor Mom is the second-largest cough brand in Russia and Rinza is the leading multi-symptom cough and cold brand in that country. However, the company’s sale of a promising business left many a doubting Thomas.

JBCPL is exiting from its OTC business in Russia/ CIS, supposedly the eighth-largest OTC market, at a time when most Indian and multi-national companies are looking at the region as a promising growth market. Moreover, the Russian OTC business contributed 35% to JBCPL’s total consolidated revenue of .`870 crore for FY11. However, the deal has not been as bad for JBCPL as it prima facie appears. The company was finding it challenging to make additional investments to grow the Russian brands further.

At this juncture, the company received around Rs 1,150 crore from the deal — equivalent to the current market cap of the company. This implies significant unlocking of value for the shareholders as 35% of the business got nearly 100% of current valuation. The company continues to hold on to a small part of the branded generics business in Russia.

Moreover, the longterm supply agreement with J&J for the sold products (in the form of contract manufacturing) is likely to accrue around $15-20 million (Rs 66-88 crore) of revenues annually. With the funds received, the company wants to grow its other two business segments, viz. domestic and rest of the world. Both these segments grew by 15% and 20%, respectively, in FY11. The challenge for the company is to grow at a faster rate.

In India, the company wants to expand its field force from the current 800 and in South Africa & Brazil, it wants to slowly shift from branded generics to contract manufacturing. For investors, the company’s stock is currently trading at a trailing price to earnings multiple of 8.2, lower than the 10.4 P/E commanded by the ET Pharma Index. Investors can consider accumulating the stock at lower levels.