Downgrade Jubilant Life Sciences to ‘hold’ from ‘add’

JLS reduced net debt by Rs 3.4bn.

Jubilant Life Sciences (JLS) has reported Q1FY21 performance below estimates due to revenue impact on account of Covid-19. Pharma segment revenue declined 17.5% while LSI business witnessed 8.5% decline. Consolidated revenue remained dropped 13.2% y-o-y Rs 18.9bn (I-Sec: Rs 23.1bn) and adjusted PAT declined 52.4% y-o-y on lower revenue and margins. Ebitda margin contracted 390bps to 16.0% (I-Sec: 21.0%). Company has launched Remdesivir, a potential treatment for Covid-19, in India and other several countries as part of licensing agreement with Gilead Life Sciences. JLS reduced net debt by Rs 3.4bn. NCLT approval for demerger of pharma and LSI businesses is awaited. Considering recent rally in stock price, we downgrade it to HOLD from Add.

Pharma business revenue decreased 17.5% y-o-y mainly on account of 26.3% fall in specialty business (radiopharma and allergy products) and 19.1% decline in CDMO business (CMO and API). Within CDMO, CMO business continued to grow while APIs faced significant decline owing ot two months of temporary operation shutdown at Nanjangud plant due to Covid-19 cases. However, generics segment witnessed a 8.9% growth led by good traction in key products in the US market. LSI business reported a decline of 8.5% impacted by lower demand of specialty intermediates and life science chemicals on account of Covid-19. Drug discovery solutions posted a healthy growth of 25.6% y-o-y driven by strong demand for its services.

Considering recent rally in stock, we downgrade it to HOLD from Add with revised target of Rs 822 based on FY22E, 8x pharma Ebitda and 4x LSI EBITDA (earlier: Rs 749). We have raised target EV/Ebitda for pharma business from 7x to 8x considering potential for additional business from Covid-19 related contracts.

Key downside risks: Regulatory hurdles and delay in ramp-up in Ruby-Fill. Key upside risks, Additional business from Covid-19 related contracts.