Following KKR’s acquisition, JB Chemicals stock has taken wing
JB’s product mix in the home market is concentrated in its top four products, which is a risk factor
Private-equity firm KKR’s purchase of a stake in JB Chemicals and Pharmaceuticals Ltd has done a lot of good for the latter’s stock. Ever since the acquisition was announced, its stock has jumped 51%. The Q1 results seem to cement the consensus street view that the new management could gear up the efficiency quotient. That’s the reason why the stock jumped 29% since the results were announced.
No doubt, JB Chemicals has an advantage in its home market with some formulations doing well. Unlike some other smaller pharmaceutical companies, it has a few chronic therapy products, which have seen decent growth even as the overall growth in the Indian pharma market remained lacklustre. Overall, its India business grew 9% year-on-year (y-o-y) in Q1, against the Indian pharma market’s 5% slide.
JB’s chronic segment sales grew in the twenties, while its acute category was hit due to lack of patient prescriptions. Nevertheless, the company’s revenue grew to 17% y-o-y in Q1. With active pharma ingredients (API) seeing a demand surge in Q1, as well as post-supply disruptions and pre-stocking by pharma giants, JB capitalized on it. This growth in the API segment of 47% y-o-y during the quarter comes in the wake of sluggish growth over several quarters. Hence, this could just be a one-off and growth could taper off in the coming quarters.
Besides, JB’s product mix in the home market is concentrated in its top four products, which contribute about 80% to its revenues. This is a risk factor if competition turns keener. JB has small operations in the US, which account for 8% of its sales. Thus, the company is heavily exposed to the domestic market.
Nevertheless, JB caught the tailwind of cost reduction in Q1. This helped its Ebitda margin vault sharply from 21% in the year-ago quarter to 30% in Q1FY21. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
KKR’s presence is expected to fuel more improvements in the business, which should kick in later as the company acquires scale. “We have assumed a flattish Ebitda in FY22E as we believe the management transition and business restructuring would take some time. Starting FY23, we believe the cost-efficiency benefits would kick in along with newer product launches in India. This should aid in margin expansion,” said Dolat Capital Markets analysts. The company has inducted new management and expanded the board.
The recent share price surge has driven valuations to a higher terrain. The stock now discounts the company’s FY22 earnings about 24 times despite upgrades to earnings. The street is betting a heavy premium on KKR’s ability to expand margins and drive launches. However, that seems to be a bit stiff valuation for a small pharmaceutical player, with much larger peers in the sector trading at 22-24 times forward earnings.
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