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Buy Jubilant Organosys with a target of Rs 368: Citigroup

Wednesday, April 25, 2007

Citigroup has maintained a Buy rating on Jubilant Organosys with a one-year price target of Rs 368. It says that the acquisition of US based Hollister-Stier has come at a reasonable valuations and is likely to be accretive from the outset.

Maintain Buy (1L)

As we believe that Jubilant's acquisition of Washington, US based Hollister-Stier Laboratories (HSL) gives it scale in CRAMS and access to niche capabilities through a fast growing and profitable business. Besides, it has come at reasonable valuations and is likely to be accretive from the outset.

The Deal

Jubilant paid US $ 122.5 million to acquire Hollister-Stier , HSL, from Winward (a PE fund) - i.e. 2.2x and 11.2x trailing sales and EBIDTA respectively, which, in our view, is reasonable. It would also reimburse more than US $ 16 million for capex incurred over the period till the deal closes in June'07. HSL generates c.60% of its revenues from contract manufacturing and the rest from allerganic extracts.

A Good Fit

HSL is a leading manufacturer of sterile injectibles and lyophilization products with a growing client base (38 customers) - mainly branded pharma companies. It gives Jubilant access to the niche and high growth injectibles segment to complement its oral dosage capabilities. We expect Jubilant to add value via a more aggressive approach to investment, business development and marketing as also exploiting cost synergies.

Accretive

HSL's CM business is highly profitable (EBIDTA margins of 26- 28%) and has grown at 40% CAGR over the last 4 years. With a growing client base, planned capacity addition and a more aggressive approach, the management expects growth rates to accelerate going forward. While the lower margin allerganic extracts business is not a focus area, it involves limited incremental investment and acts as a cash cow. With the deal being funded by idle cash on balance sheet, we expect it to be EPS accretive from Year 1.

Valuation

We use sum-of-the-parts to value Jubilant in view of the diversified nature of its business and earnings streams. We value both businesses using the EV/EBIDTA methodology but apply different target multiples to each business given the difference in their growth and operating parameters. We arrive at a one-year target price of Rs 368. We value Jubilant's P&LS business at 15x March 2008E EV/EBIDTA and the non-P&LS business at 7x March 2008E EV/EBIDTA. Our target valuation of for the P&LS business is benchmarked to the upper end of Jubilant's past four-year EV/EBIDTA range. We are comfortable using a higher multiple vis-à-vis some of its mid-sized Pharma peers due to strong growth rates and the upside potential when idle FCCB proceeds are deployed in the core business. Industrial chemicals and performance chemicals are mature businesses in which Jubilant has indicated that it does not intend to make any significant incremental investment. However, the company's competitive edge in these areas would ensure that it is able to generate steady profits from these businesses. We therefore value these businesses at 7x June 2007E EBIDTA, which is in line with the multiple that Jubilant used to trade at around four years ago when these businesses contributed almost entirely to the company's revenues and profits

Posted by FR at 6:21 PM  

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Investment in equity shares has its own risks. Sincere efforts have been made to present the right investment perspective.The information contained herein is based on analysis and up on sources that we consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and I am not responsible for any loss incurred based upon it.& take no responsibility whatsoever for any financial profits or loss which may arise from the recommendations given in this blog.