‘Add’ Jubilant Life Sciences with revised TP of Rs 936

Jubilant Life Sciences (JLS) has recently received the NCLT approval for demerger of pharma and LSI businesses into two separate companies. We believe separate listing of both companies should happen in the next few weeks, before FY21 ends. The company had announced this demerger in Oct ‘19 with the rationale of two separate and focused entities for pharma & LSI segment and to unlock shareholder value. There could be some value unlocking as combined entity trades at a discount to sector peers.

However, we do not expect material valuation rerating, considering modest growth outlook and debt on the books. The company had entered into four CDMO agreements for clinical and commercial supply agreements for Covid-19 treatment and vaccine candidates, which may provide an upside to our estimates in near to medium term. Retain ‘add’.

The board had initially approved the re-organisation of the businesses in Oct ‘19 and the approval from shareholders and creditors was received in Aug ‘20.

Key objectives of this re-organisation were to have separate focus business entities, better management of risks and regulatory requirements, enabling strategic growth with optimal capital allocation, and unlocking of shareholder value.

As per the re-organisation plan, LSI business will be demerged into a separate entity and some promoter entities will be amalgamated into JLS in order to simplify the holding structures of the promoters with no change in ownership of promoters. The pharma entity will include businesses like radio pharma, allergy therapy products, CDMO of sterile & non-sterile products, APIs, generic formulations, drug discovery services (DDS) and proprietary drug discovery business (biopharma). The LSI entity will include specialty intermediates, nutritional products and life science chemicals.

The company had net debt of Rs 29.8bn as on Sep ‘20, of which ~Rs 22bn pertains to pharma business. We estimate consolidated revenue, Ebitda and PAT CAGRs of 6.6, 7.0 and 8.6% over FY20-FY23E, respectively. H1FY21 was impacted due to Covid-19 related disruptions and weak demand. However, we estimate recovery in H2FY21. Current gross and net debts, as on Sep ‘20 stands at Rs 41.5bn and Rs 29.8bn, respectively.

We marginally raise our revenue and Ebitda estimates by 0-1% and 1-2% for FY21-FY23E respectively to factor in higher growth in CDMO segment. We maintain ‘add’ on the stock with a revised target price of Rs 936 based on Sep ’22E, 9x pharma Ebitda and 4x LSI Ebitda (earlier TP: Rs 852). Key downside risks are regulatory hurdles and delay in recovery of specialty business.