Jubilant Life is likely to do well in future on new launches, changes in pricing

Jubilant Life’s results for the fourth quarter of 2012-13 were below the street expectation as net profit fell by 20%. The performance was hurt by a decline in EBITDA margin due to pricing pressure in the US market, lower profitability in drug discovery business, etc. As expected, the stock price reacted negatively and the underperformance by Jubilant Life against the Sensex has widened further.

Jubilant Life is quoting at a deep discount to its peers for the past few years because of its volatile earnings and high leverage. However, the profitability of the company is expected to improve in the coming years, especially from the second half of 2013-14. Incremental product launches in generic business, increased capacity utilisation in recently commissioned facilities and improvement in pricing environment for life sciences ingredients (LSI) business are expected to be some of the triggers.

The management is also taking steps to reduce the company’s net debt. Jubilant Life reduced its debt by Rs 261 crore in 2012-13 and is expected to reduce it by a bigger amount in the coming financial year. The management’s target is to bring the net debt to EBITDA ratio below 2.5 times by 2015. This will be achieved by operational improvement and by containing the capital expenditures to Rs 250 crore per annum. The company is also planning to reorganise its business into two verticals—pharma business and drug discovery business.

The purpose is to raise money by listing the pharma business for its growth and also to reduce the overall consolidated debt of the company.

The consensus analysts’ rating has moved up in the past one month mostly because the recent correction in this counter was overdone. While some discount in valuation is justified for Jubilant Life, the recent correction has increased the valuation gap to unsustainable levels.

Compared to its own historical valuations too, Jubilant Life’s valuation is now placed at a 5-year low and at more than 40% discount to its average.

Since the improving operational performance and the reduction in debt are going to be the major drivers for a re-rating in this counter, the stock is a good value pick for long-term investors.

While the warning letter from the FDA is an overhang now, the issue is expected to get resolved soon and a resolution of this can be another trigger for the counter Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell). An improvement in rating indicates that the analysts are becoming more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks that have been covered by at least 10 analysts.