KKR’s premium for JB Chemicals stake is not enthusing for a good growth franchise

Shares of JB Chemicals and Pharmaceuticals Ltd were flat between October 2016 and October 2019. But in the past eight months, they have more than doubled. This has partly got to do with the news of a buyout by a private equity firm, which has been floating in the market for a while.

Besides, investor sentiment for pharmaceutical stocks has improved in the recent months. The upshot: shareholders of JB Chemicals are sitting on hefty gains already. News of the buyout by KKR and its open offer at ₹745 per share may not seem too exciting at first, given that the shares currently trade at ₹718 on the bourses.

However, against the backdrop of about 116% gains in the past eight months, shareholders seem to be getting a decent deal, prima facie. After all, the company’s promoters, too, are selling a majority of their stakes at this price.

But some analysts said that patient investors can sit out the open offer by KKR at ₹745 and wait for better returns later.

“The purchase price represents price-earnings of 22 times on trailing earnings of ₹34. This, in our view, does not represent any premium for the franchise that has improved significantly in the recent past,” said Kunal Damesha, an analyst with Systematix Securities.

JB Chemicals has been growing at a decent clip over the past three years. It clocked growth in April and May of about 12% in its top brands as against a 10% decline in the Indian Pharma Market, owing to decent brands in the chronic segment.

Growth in the acute segment was slow, though. In addition, JB Chemicals’ cash flow generation has improved, while return on equity jumped from 13% last year to 20% in FY20.

“Growth will moderate in FY21 owing to one-off covid-related disruptions. However, we still expect JB Chemicals’ India business to grow in double digits in FY21, based on trends seen in April and May 2020,” said IIFL Securities analysts in a recent note to clients.

Besides, note that KKR is looking to acquire a 54% stake in the company, which would give it a controlling stake in JB Chemicals.

If it manages to grow the franchise, investors could well expect the decent returns to continue. And, the founders are not entirely selling out, and will continue to have some skin in the game.

For investors with patience and willingness to bank on KKR’s abilities, there may still be some juice left in the stock.

Analysts said given the lack of a decent premium to the current market price, investor participation in the open offer may not be significant in any case.