According to Hari Bhartia, co-Chairman and Managing Director, Jubilant Organosys, the deal is not an expensive one if looked at the injectibles market, which has a high margin. To emphasize the rationale behind the move, he said Hollister-Stier has been growing at almost 40% in their contract manufacturing business.
Excerpts from CNBC-TV18’s exclusive interview with Hari Bhartia:
Q: It seems like an expensive deal. Is it a low margin company?
A: The deal, if you look at the injectibles market, is not an expensive one. The business has got high margin and Hollister-Stier has been growing at almost 40% in their contract manufacturing business.
Q: Are they into high-end CRAMS? Could you list their top 10 clients?
A: It’s very difficult to list out clients. I can tell you that some of the most prominent biotech and large pharma companies are their clients and they do all kinds of work from small volume parentals to clinical trial quantities.
Q: Will any projects be moved to India because of this buy?
A: No. We are mainly doing contract manufacturing for branded products, which are really patented drugs of a very high value. Clients are not really looking for cost reduction but are looking for very good quality. Since this is sterile manufacturing, the quality has to be of very high standard. We will continue to build and there is an expansion going on currently, which will almost take capacity to 2.5 times. As of now we are looking at using that facility to grow the market.
Source: CNBC
The company has reported net profit of Rs 63.8 crore (Rs 638 million) in fourth quarter and revenues at Rs 463 crore (Rs 4.63 billion).
Citigroup report on Jubilant Organosys:
Maintain Buy (1L)
As we believe that Jubilant's acquisition of Washington, US based Hollister-Stier Laboratories (HSL) gives it scale in CRAMS and access to niche capabilities through a fast growing and profitable business. Besides, it has come at reasonable valuations and is likely to be accretive from the outset.
The Deal
Jubilant paid US $ 122.5 million to acquire Hollister-Stier , HSL, from Winward (a PE fund) - i.e. 2.2x and 11.2x trailing sales and EBIDTA respectively, which, in our view, is reasonable. It would also reimburse more than US $ 16 million for capex incurred over the period till the deal closes in June'07. HSL generates c.60% of its revenues from contract manufacturing and the rest from allerganic extracts.
A Good Fit
HSL is a leading manufacturer of sterile injectibles and lyophilization products with a growing client base (38 customers) - mainly branded pharma companies. It gives Jubilant access to the niche and high growth injectibles segment to complement its oral dosage capabilities. We expect Jubilant to add value via a more aggressive approach to investment, business development and marketing as also exploiting cost synergies.
Accretive
HSL's CM business is highly profitable (EBIDTA margins of 26- 28%) and has grown at 40% CAGR over the last 4 years. With a growing client base, planned capacity addition and a more aggressive approach, the management expects growth rates to accelerate going forward. While the lower margin allerganic extracts business is not a focus area, it involves limited incremental investment and acts as a cash cow. With the deal being funded by idle cash on balance sheet, we expect it to be EPS accretive from Year 1.
Valuation
We use sum-of-the-parts to value Jubilant in view of the diversified nature of its business and earnings streams. We value both businesses using the EV/EBIDTA methodology but apply different target multiples to each business given the difference in their growth and operating parameters. We arrive at a one-year target price of Rs 368. We value Jubilant's P&LS business at 15x March 2008E EV/EBIDTA and the non-P&LS business at 7x March 2008E EV/EBIDTA. Our target valuation of for the P&LS business is benchmarked to the upper end of Jubilant's past four-year EV/EBIDTA range. We are comfortable using a higher multiple vis-à-vis some of its mid-sized Pharma peers due to strong growth rates and the upside potential when idle FCCB proceeds are deployed in the core business. Industrial chemicals and performance chemicals are mature businesses in which Jubilant has indicated that it does not intend to make any significant incremental investment. However, the company's competitive edge in these areas would ensure that it is able to generate steady profits from these businesses. We therefore value these businesses at 7x June 2007E EBIDTA, which is in line with the multiple that Jubilant used to trade at around four years ago when these businesses contributed almost entirely to the company's revenues and profits.
Source : CNBC
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