Jubilant Organosys - Updates

Jubilant Organosys'

Attractive valuations and growth potential make it a good bet for
long-term investors, who want to cash in on fast-track growth in the
CRAMS segment IN THE current environment of cost-cutting, outsourcing
has gained prominence. In the pharmaceutical sector, this is
represented by contract research and manufacturing services (CRAMS)
business, which has huge growth potential. Jubilant Organosys has
become the largest player in the CRAMS segment, after the recent
acquisition of US firm Draxis. The company's attractive valuations and
growth potential make it an interesting bet for long-term investors.
BUSINESS: Established in 1978, the Uttar Pradesh-based company was
formerly known as Vam Organic Chemicals (VOCL) and was promoted by
Sweden-based Bofors, Hindustan Wires and ML Bhartia of the Bhartia
group. Over the years, Jubilant has evolved into an integrated pharma
player, while continuing its legacy business of industrial chemicals.
The company was one of the first in India to venture into the CRAMS
segment, providing products and services to global life sciences
companies. It is currently involved in contract research and
manufacturing of active pharma ingredients (APIs) and industrial
chemicals.

The company has four different business divisions, viz pharma and life
science products (PLSP), drug discovery and development services
(DDDS), industrial products and performance polymers. Jubilant earns
63% of its revenue from the pharma business and the remaining from its
industrial and performance products. More than 70% of its revenue is
contributed by its international business, while the rest is accounted
for by its domestic business.

The company has also forayed into the healthcare segment and currently
operates a 92-bed hospital in West Bengal. This is a strategic move
towards forward integration, as it will help the company to enroll
patients for its growing clinical trial services.

GROWTH STRATEGY:Jubilant's pharma and drug discovery businesses are
expected to record the fastest growth, going forward. The ratio of the
company's pharma to non-pharma business is likely to increase to 75:25
within the next few years. In June '07, Jubilant acquired US-based
Hollister-Stier Labs, operating in the contract injectibles segment. In
May '08, the company acquired Speciality Molecules, a niche
manufacturer of speciality intermediates, with manufacturing facilities
located in Mumbai, for Rs 20 crore. The acquisition strengthened
Jubilant's ability to provide comprehensive pyridine derivatives to
customers in the life sciences industry. Around the same time, it
acquired Canada-based Draxis for $253 million, marking its entry into
the $750-million US radiopharmaceutical market and increasing its
business of sterile and nonsterile products in the US.

This month, the company's 100% subsidiary, Jubilant Biosys, entered
into a drug discovery partnership with Amgen, the largest US-based
biotech company. Under this partnership, Amgen and Jubilant will
collaborate to develop a portfolio of novel drugs in new target areas
of interest across multiple therapeutic areas. The company plans to
ramp up its hub & spokes hospital business to a 1,000-bed hospital with
a capital expenditure (capex) of Rs 170-180 crore by '10. This will
significantly boosts its revenues in future. FINANCIALS: Over the past
five fiscal years, Jubilant has posted a compound annual growth rate
(CAGR) of 25.5% in consolidated revenues, which stood at Rs 2,488.9
crore in FY08. Likewise, the company's consolidated earnings have
witnessed a CAGR of 53% during the same period to reach Rs 400.5 crore
in FY08. However, since the company is in a growth phase, it has a low
dividend payout ratio of 12% (average of past five years) and hence, a
lower dividend yield.

The company has adopted the strategy of growing inorganically. But
going forward, it plans to grow organically and integrate its acquired
businesses. For this, Jubilant plans to incur a capex of Rs 700 crore
during FY09.

VALUATIONS:

The company is currently trading at an earnings per share
(EPS) of Rs 18.3. Due to expansion in capacities, increased product
profile and expanding global market footprint, it expects to post more
than 50% increase in revenue for FY09. Accordingly, considering
Jubilant's estimated consolidated earnings for FY09 and FY10, the
company is currently trading at forward P/Es of 8.5 and 6.3,
respectively.

Jubilant's stock has outperformed the Sensex since the beginning of
this year. Its stock price has declined only 8.6%, against 35% fall
registered by the Sensex. Investors who want to cash in on the
fast-track growth in the CRAMS segment can consider this undervalued
stock.

Beta: 0.4 Institutional Holding: 32% Dividend Yield: 0.4% P/E: 17.4
M-Cap: Rs 4,702.1 cr CMP: Rs 310