J. B. Chemicals & Pharmaceuticals Ltd (JB chem), established in 1976, is a 40-year-old pharma company. It is one of the fastest-growing pharmaceutical companies in India and a leading player in the hypertension segment. Besides its strong India presence, which accounts for the majority of its revenue, its other two home markets are Russia and South Africa. In India, the company has five brands among the top 300 IPM brands in the country. The company exports its finished formulations to over 40 countries including the USA. Besides supplying branded generic formulations to several countries, it is also a leader in manufacturing medicated lozenges. The company ranks among the top 5 manufacturers globally in medicated and herbal lozenges. It has seven state-of-the-art manufacturing facilities in India including a dedicated manufacturing facility for lozenges. The manufacturing facilities are certified by leading regulators across the world.
JBCP has several well-established brands in the domestic market and a wide geographical presence in export markets with a focus on both regulated and semi-regulated territories. The company is ranked 34th by sales value and 19th by the number of prescriptions in the Indian pharma market (IPM). A focused strategy around the brand building has aided JBCP to consistently outperform IPM growth by ~300-350bps pa during the past few years. Cardiac and Gastro are the major therapies for JBCP accounting for 90% of the company’s India revenue. The company’s key export markets include Russia/CIS, South Africa, and the US.
Well-diversified business model
JB Chemicals and Pharmaceuticals Ltd. (JB Chem) is one of India’s fastest-growing pharmaceutical companies with more than four decades of strong existence in the industry. It exports to over 30 countries, including key markets such as South Africa (rainbow nation), Russia, and CIS followed by the USA (which contributes ~ 50-55% of its overall revenue). The company has 7 State-of-the-art manufacturing units in Gujarat, India (approved by various regulatory authorities) producing a wide range of dosage forms i.e. Tablets, Capsules, Liquids, Iv Infusions, Ampoules, Vials, Ointments, Cold Rubs, Lozenges & Sips. It is a leading player in the hypertension segment and has five brands among the top 300 brands with more than 30% market share that contribute over 70-74% of domestic formulations revenues and ranks among the top 5 manufacturers globally in medicated and herbal lozenges.
Domestic business on strong footing
JBCP’s domestic formulation biz (including contrast media) contributes ~50% to its total revenues. The company is well placed to outperform IPM (India Pharma Market) led by 1) focus on core chronic therapies, 2) leveraging of existing field force (2100 MRs) to expand and launch new therapies, and 3) top 3-4 brands becoming larger post distribution reach going beyond Tier 1 & 2 cities (that contribute the majority of revenues). JBCP’s top brands Metrogyl, Nicarida and Rantac are under price control. Rantac has taken a price hike of 50% in 70% of its SKUs, effective from Q4FY22. (NPPA has allowed a one-time price hike of 50%).
The company’s recent Sanzyme acquisition in the high-growth probiotics and reproductive health segment has marked its entry into the fast-growing probiotics segment. Currently, the probiotic segment is growing annually by 12-14%, besides the acquisition is expected to create new synergies with a strong prescriber base in the gastroenterology and nephrology segments. Additionally, the Azmarda acquisition too is expected to strengthen JBCP’s presence in India’s Cardiology segment and consolidate a position in IPM.
Diversified export- growth driver in the near term
Exports contribute 50% to JBCP’s total revenue. We are positive on long-term growth drivers in the exports segment led by 1) consolidation of business through a deeper presence in existing markets 2) focus on high-margin CMO business 3) expansion of OTC presence and launch of new products in Russia-CIS markets 4) portfolio augmentation in private and public markets of South Africa and 5) increased focus on ANDA filings in the US and selective backward integration for US business.
Q3FY23 Financial Performance
JBCP consolidated revenues grew by 32% YoY to Rs792.71 cr. The beat was aided by higher domestic and CMO revenues. Domestic formulation sales grew by 46% YoY, growth was led by key legacy and acquired brands. Export formulations posted healthy growth of 11% YoY, while CMO segment continued to be robust with a growth of 91% YoY (down 10% QoQ) to Rs.95.7 cr. EBITDA came in at Rs 175 cr up 36% YoY (down 5% QoQ). The operating Profit Margin came in at 22% (down 75bp QoQ). GM was down 40bps QoQ to 62.3%. The YoY decline in GMs was due to continued inflationary pressure on input costs and higher sales from Azmarda products. PAT came in at Rs106.1 cr (up 27% YoY). The company aspires to grow at 14-15% growth and 16‐18% profit growth for the next few years. JB Chemicals and Pharmaceuticals reiterate the focus on margin between 24‐26% for FY23.
Key Risks & Concerns
Susceptibility to intense competition and fluctuation in foreign exchange (forex) rates
The group mainly caters to therapeutic segments such as gastro, cardiovascular, antibiotic, and pain management. High concentration in the relatively slow-growing acute therapeutic segments (50% of domestic sales) exposes the group to pricing and competitive pressure in a mature market, more especially as products under price control account for almost 35% of sales. The group is also susceptible to fluctuations in forex rates in semi-regulated markets.
Susceptibility to regulatory changes
The group remains vulnerable to regulatory changes in domestic and international markets. Addition to lists under the Drug Price Control Order impacts product pricing and, thereby, the profitability of players, though the extent of the impact may vary. Increasing scrutiny and inspections by authorities such as the US Food and Drugs Administration (US FDA) and Therapeutic Goods Administration further, intensify the regulatory risk.
The slowdown in export markets
Any slowdown in export markets or macro uncertainty could adversely impact the company’s earnings performance and acts as a key risk for the company.
Outlook & Valuation
Domestic growth is expected to be steady JB Chemicals on the back of acquisitions. JB Chem expects upward revision in margins from FY24. We like JB chem for its focus on chronic therapy. We believe JB Chemicals will continue with its growth momentum driven by 1) geographical expansion of legacy brands 2) improvement in MR productivity 3) scale up in Sanzyme, Azmarda and Razel franchise 4) launch of new products & therapies 5) scaling up contract manufacturing business 6) improvement in FCF generation 7) strong execution in the acquired portfolios 8) new launches/customers in high-margin CMO business and steady revenue growth in exports market led by new launches.
At a CMP of Rs.2171, the stock is currently trading at 23x FY25E EPS (Rs.92.4) which appears reasonable and we recommend BUY on the stock.