J.B. Chemicals & Pharmaceuticals (JBCP) is one of India’s fastest growing midsized Indian pharma company having superior return ratios. The company has shown sustainable growth momentum driven by geographical expansion of legacy brands, improvement in MR productivity, Sanzyme and Azmarda acquisition, launch of new products and therapies, scaling up contact manufacturing business and improvement in FCF generation.

JBCP’s strong positioning in domestic markets and focus on scaling emerging opportunities in exports segment, places it in an advantageous position to ride on near term growth prospects. Prabhudas Lilladher expects 24% EPS CAGR over FY22-25E.

Strong revenue growth across domestic formulation and CMO segment: JBCP revenues grew by 37% YoY to Rs8.1bn vs our est 7.6bn aided by higher CMO revenues. Domestic formulation sales grew by 47% YoY, growth was led by key legacy and acquired brands. Export formulations posted strong growth of 17% YoY while CMO segment surprises positively with growth of 64% YoY and 10% QoQ to Rs 1.1bn vs our est. of Rs 800mn. API saw a growth of 10% YoY. 

EBITDA beat on higher CMO revenue: EBITDA came in at Rs 1.8bn up 46% YoY (up 7% QoQ), vs our est of Rs1.65bn. OPM came in at 22.8% (up 80bp QoQ). Adjusted for ESOP (Rs170mn); OPM came in at 24.7%. Gross margin was flat QoQ to 62.7%. The YoY decline in GMs was due to inflationary pressure on input cost, packaging material cost and negligible margin from Azmarda product. PAT came in at Rs1.1bn (up 14% YoY) vs our estimates of Rs 1bn.

Key concall takeaways: (1) Domestic formulations: Excluding sales from the acquired brands, growth was around mid-teens for Q2 and H1 FY23. New Product contributed 4.4% to domestic sales for Q2FY23 Company is on track to improve its IPM ranking and its key brands have gained market share

(2) New Brand: The recently acquired brands have progressing as per mgt. plan. Sporolac grew by 50% and remains #1 in its covered market space. Azmarda recorded growth of 46% with revenues clocking Rs100mn /month

(3) The organic growth is driven by 7-8% price growth, 5-6% volume growth and 3-4% new introductions during Q2FY23.

(4) Management indicated MR productivity to reach 0.65mn by end of FY23. Total MR at 2100 across base business, Sanzyme and Azmarda.

(5) CMO business - Company continue to invest in lozenges research for marquee customers. H1 growth was aided by adding new products with existing customers and current order book remains healthy.

The Management of the company sees this business reaching $100mn revenues and likely to contribute 20% to total revenue over period of time vs 14% currently (6) Russia and SouthAfrica markets also grew in double digits during Q2 (7) Guided for operating margins at 24-26% in FY23. (7) ESOP cost likely to come off to Rs380-400mn in FY24 and Rs 250-300mn in FY25.