CIRCLE Of Life

Jubilant Organosys'

attractive valuations and growth potential make it a good bet for long-term investors, who want to cash in on fast-track growth in the CRAMS segment

 IN THE current environment of cost-cutting, outsourcing has gained prominence. In the pharmaceutical sector, this is represented by contract research and manufacturing services (CRAMS) business, which has huge growth potential. Jubilant Organosys has become the largest player in the CRAMS segment, after the recent acquisition of US firm Draxis. The company's attractive valuations and growth potential make it an interesting bet for long-term investors.
BUSINESS: Established in 1978, the Uttar Pradesh-based company was formerly known as Vam Organic Chemicals (VOCL) and was promoted by Sweden-based Bofors, Hindustan Wires and ML Bhartia of the Bhartia group. Over the years, Jubilant has evolved into an integrated pharma player, while continuing its legacy business of industrial chemicals. The company was one of the first in India to venture into the CRAMS segment, providing products and services to global life sciences companies. It is currently involved in contract research and manufacturing of active pharma ingredients (APIs) and industrial chemicals.
    The company has four different business divisions, viz pharma and life science products (PLSP), drug discovery and development services (DDDS), industrial products and performance polymers. Jubilant earns 63% of its revenue from the pharma business and the remaining from its industrial and performance products. More than 70% of its revenue is contributed by its international business, while the rest is accounted for by its domestic business.
    The company has also forayed into the healthcare segment and currently operates a 92-bed hospital in West Bengal. This is a strategic move towards forward integration, as it will help the company to enroll patients for its growing clinical trial services.
GROWTH STRATEGY:Jubilant's pharma and drug discovery businesses are expected to record the fastest growth, going forward. The ratio of the company's pharma to non-pharma business is likely to increase to 75:25 within the next few years. In June '07, Jubilant acquired US-based Hollister-Stier Labs, operating in the contract injectibles segment. In May '08, the company acquired Speciality Molecules, a niche manufacturer of speciality intermediates, with manufacturing facilities located in Mumbai, for Rs 20 crore. The acquisition strengthened Jubilant's ability to provide comprehensive pyridine derivatives to customers in the life sciences industry. Around the same time, it acquired Canada-based Draxis for $253 million, marking its entry into the $750-million US radiopharmaceutical market and increasing its business of sterile and nonsterile products in the US.
    This month, the company's 100% subsidiary, Jubilant Biosys, entered into a drug discovery partnership with Amgen, the largest US-based biotech company. Under this partnership, Amgen and Jubilant will collaborate to develop a portfolio of novel drugs in new target areas of interest across multiple therapeutic areas. The company plans to ramp up its hub & spokes hospital business to a 1,000-bed hospital with a capital expenditure (capex) of Rs 170-180 crore by '10. This will significantly boosts its revenues in future. FINANCIALS: Over the past five fiscal years, Jubilant has posted a compound annual growth rate (CAGR) of 25.5% in consolidated revenues, which stood at Rs 2,488.9 crore in FY08. Likewise, the company's consolidated earnings have witnessed a CAGR of 53% during the same period to reach Rs 400.5 crore in FY08. However, since the company is in a growth phase, it has a low dividend payout ratio of 12% (average of past five years) and hence, a lower dividend yield.
    The company has adopted the strategy of growing inorganically. But going forward, it plans to grow organically and integrate its acquired businesses. For this, Jubilant plans to incur a capex of Rs 700 crore during FY09.
VALUATIONS: The company is currently trading at an earnings per share (EPS) of Rs 18.3. Due to expansion in capacities, increased product profile and expanding global market footprint, it expects to post more than 50% increase in revenue for FY09. Accordingly, considering Jubilant's estimated consolidated earnings for FY09 and FY10, the company is currently trading at forward P/Es of 8.5 and 6.3, respectively.
    Jubilant's stock has outperformed the Sensex since the beginning of this year. Its stock price has declined only 8.6%, against 35% fall registered by the Sensex. Investors who want to cash in on the fast-track growth in the CRAMS segment can consider this undervalued stock.
Beta: 0.4 Institutional Holding: 32% Dividend Yield: 0.4% P/E: 17.4 M-Cap: Rs 4,702.1 cr CMP: Rs 319