Jubilant Pharmova's (Jubilant) Q3FY21 performance above our estimates aided by recovery in CMO and generics business with supplies of COVID-19 related products. The company has announced demerger of Life Science Ingredients business into Jubilant Ingrevia Ltd. Pharma business revenue grew 16.7% YoY to Rs17.7bn, EBITDA margin improved 80bps YoY to 27.8% and adj. PAT grew 20.3% to Rs2.3bn. The company had launched Remdesivir, a potential treatment for COVID-19, in India and several other countries; this helped in 57% revenue growth in generics segment. Similarly, CDMO business was also benefited by manufacturing of potential COVID-19 drug and vaccines. We believe near to medium term growth would remain strong driven by recovery in radiopharma business and continued supplies of COVID-19 related products.

CDMO and generics drove growth: Pharma business revenues grew 16.7% YoY driven by 65.4% increase in CDMO business (CMO and API) and 57.0% jump in generics revenue. Within CDMO, CMO business was benefited by start of contract manufacturing of Eli Lily's Bamlanivimab (for COVID-19 treatment) and COVID-19 vaccine candidate NVX-CoV2373 for Novavax. Generics segment growth was led by good traction in key products in the US market and Remdesivir launch in various countries. However, the specialty segment remained under pressure and declined 23.8% due to fewer patient footfalls in hospitals.

Margin improved with strong revenue growth: Reported EBITDA margin at 27.8% was up 80bps YoY, driven by strong revenue growth and higher margin in COVID-19 related products. Gross margin contracted 230bps due to lower specialty revenues. Overall, we expect EBITDA margin to remain stable at ~27% going forward.

Demerger complete: Jubilant announced the completion of demerger of pharma and LSI business into two separate companies w.e.f. 1st Feb'21. LSI business has been demerged into a separate entity named Jubilant Ingrevia and existing company has been renamed as Jubilant Pharmova which will have the pharma business. We have restated the financials of FY20 and 9MFY21 as provided by company and based on certain assumptions. We also remove LSI business from our financials estimates over FY21E-FY23E.

Outlook: We estimate revenue, EBITDA and PAT CAGRs of 8.4, 9.9 and12.2% respectively over FY20-FY23E. Demand in specialty pharma remains below pre-COVID levels, while other businesses have reverted to normal levels. Company continues to focus on reducing debt (Rs3.77bn reduced in Q3FY21) and current net debt of pharma business stands at ~Rs20bn.

Valuations and risks: We maintain ADD rating on the stock with a revised target price of Rs994/share based on 16xFY23E EPS. We have changed our valuation methodology from SoTP (EV/EBITDA) to P/E as only pharma business remains. Key downside risks: regulatory hurdles and delay in the recovery of specialty business.