JB CHEMICALS -- value buy

[HG_6470]

hitbhai,

the stock seems to be correcting a bit. what do you think of getting in at 75-80 levels?

[HG_6470]

Per the moneycontrol site, it looks like Ashish Dhawan exited this stock.

[onlycastel]

Here is a good, easy technical analysis of J B Chemicals by Deepak Singh who has his own blog called State of the Market. The article was written on 29th November, 2012. This is for investors following the stock.

http://stateofthemarket.net/2012/11/bullish-hope-on-jb-chemicals-and-pharma/

[prashant]

@hitesh2710

JB Chemicals seems to be a good value pick.

current market cap of around 640 crores.

Company has cash and investments of around 550 crores and debt of around 70 crores.

Effectively company has cash and equivalents of 480 crores. (this i assume after calculating the special dividend paid to shareholders of around 40 rs per share.)

So one gets the company at effective price of 160 crores. This for a company which has presence in India, and a lot of other export markets.

June qtr revenues has been around 190 crores. Some rough extrapolation gives yearly sales figure of around 800 crores. Company is available at market cap to sales of 0.2 which seems very attractive.

Company last year sold off its OTC business in Russia and CIS countries for a net income of 760 crores. It paid special interim dividend of 338 crores and tax thereon of 55 crores.

chemcials seems to be in deep undervaluation territory with company available at an enterprise value of 160 crores and market cap to sales ratio of through the fy 12 AR, management seems upbeat about the prospects of remaining parts of the business which mainly includes Indian operations and Rest of World like a low risk high return kind of scenario for the patient investor bcos once the company gets its act together post selling the Russian-CIS OTC business, there could be a strong appetite for the stock even as a growth to note here that Ashish Dhawan (formerly of Cryscapital) has been consistently increasing his stake in this one over the past few quarters and currently holds around 10% Initial entry into the stock at around 75 per

**

Investment theme

Jb

** 0.2.Going **

** exports.Looks **

** stock.Interesting **

** stake.disc: **

share.

**Hi, be cautious about cash per share working. Sept12 results show that the company has received notices of claim from Johnson & Johnson affiliates in relation to transaction documents executed with them for sale of Russia-CIS OTC business last year. The company has communicated its denial and replied to the said notices in detail. The claims made correspond to amount held in the escrow account. The company believes that these claims are untenable and it will
take necessary steps to protect the stakeholdersâ interest.This amount is about Rs163 crores (Mar12 AR). Not sure how this will play out in the next few months.
**

**

[shashikapoorin]

Results on 5 Feb

[Hardtoget]

http://www.pharmabiz.com/NewsDetails.aspx?aid=73598&sid=2

Rs.21.87 crore profits/ against net loss ofRs.5.17 crore last year

net sales up 33.6 per cent toRs.199.76 crore fromRs.149.56 crore

earnings per shareRs.2.58 vs negative earnings last year

[typebharat]

@prashant

JB Chemicals seems to be a good value pick.

current market cap of around 640 crores.

Company has cash and investments of around 550 crores and debt of around 70 crores.

Effectively company has cash and equivalents of 480 crores. (this i assume after calculating the special dividend paid to shareholders of around 40 rs per share.)

So one gets the company at effective price of 160 crores. This for a company which has presence in India, and a lot of other export markets.

June qtr revenues has been around 190 crores. Some rough extrapolation gives yearly sales figure of around 800 crores. Company is available at market cap to sales of 0.2 which seems very attractive.

Company last year sold off its OTC business in Russia and CIS countries for a net income of 760 crores. It paid special interim dividend of 338 crores and tax thereon of 55 crores.

chemcials seems to be in deep undervaluation territory with company available at an enterprise value of 160 crores and market cap to sales ratio of through the fy 12 AR, management seems upbeat about the prospects of remaining parts of the business which mainly includes Indian operations and Rest of World like a low risk high return kind of scenario for the patient investor bcos once the company gets its act together post selling the Russian-CIS OTC business, there could be a strong appetite for the stock even as a growth to note here that Ashish Dhawan (formerly of Cryscapital) has been consistently increasing his stake in this one over the past few quarters and currently holds around 10% Initial entry into the stock at around 75 per be cautious about cash per share working. Sept12 results show that the company has received notices of claim from Johnson & Johnson affiliates in relation to transaction documents executed with them for sale of Russia-CIS OTC business last year. The company has communicated its denial and replied to the said notices in detail. The claims made correspond to amount held in the escrow account. The company believes that these claims are untenable and it will
take necessary steps to protect the interest.This amount is about Rs163 crores (Mar12 AR). Not sure how this will play out in the next few months.
**

Part of the disputed amount kept in escrow has been released.

One more concern is other income going down by 50% . This along with some industry people talking about JBChem parking some of the surplus funds in real estate. So we need to understand where this money - close to 200Cr - has been deployed. Rest continues to be parked in liquid instruments.

**

Investment theme

Jb

** 0.2.Going **

** exports.Looks **

** stock.Interesting **

** stake.disc: **

** share.

Hi, **

stakeholdersâ**

[hitesh2710]

J B chem has come out with good q2 fy 14 results.

period q2 fy 14 q2 fy 13 h1 fy 14 h1 fy 13 fy 13

sales 247 212 476 396 794

OP 41 25 74 40 80

NP 33 39 53 43 85

net profit has been affected due to lower other income and forex loss as compared to q2 fy 13.

The main theme here is the expected margin improvement due to change in drug pricing policy… Earlier the drug pricing was on a cost plus basis whereas now it is average of the cost of leading brands… This helps JB chem in improving margins in domestic market products like rantac, metrogyl … There is an informative initiating coverage report by indianivesh guys.

[hitesh2710]

JB CHEMICALS cup and handle pattern.

There are two cup and handle patterns on jb chem… first is shorter term pattern shown on right side of chart and labelled in smaller case… cup and handle.

The larger cup and handle is on long term and labelled on left side of chart as CUP AND HANDLE.

[ayushmit]

Yes, JB Chemicals looks very interesting on the valuations front. Also, the promoters are very good and have been fair…they should be able to put cash to good use.

Ayush

[sunilsurana]

Hello Senior ValuePickers,

Given JB Chemicals have increased a lot since August. Is currently good time to take positions or wait for some correction?

Thanks,

Sunil

[hitesh2710]

iamsunil

till now markets were not comfortable with cash on books of jb chem… maybe there was distrust about management.

Now it seems the fears about that are receding… And when that happens that cash adds value to the total valuation of stock.

Coming to fundamentals, JB is likely to post eps of around 12 plus for fy 14… For a company with cash of close to 500 crore and market cap of 940 crores, enterprise value comes close to around 500 crores and on that company is likely to post net profit of 120 crores. That to me doesnt sound too expensive.

One of the models of spotting winners is to spot stocks at or near to all time highs which on valuations also appear attractive.

You may be late in joining the party but the party may just have begun and you may not have missed much of the fun.

[sunilsurana]

Thank you Hitesh Bhai.

I loved your sentence “You may be late in joining the party but the party may just have begun and you may not have missed much of the fun”.

[jaunty]

@hitesh2710

iamsunil

till now markets were not comfortable with cash on books of jb chem… maybe there was distrust about management.

Now it seems the fears about that are receding… And when that happens that cash adds value to the total valuation of stock.

Coming to fundamentals, JB is likely to post eps of around 12 plus for fy 14… For a company with cash of close to 500 crore and market cap of 940 crores, enterprise value comes close to around 500 crores and on that company is likely to post net profit of 120 crores. That to me doesnt sound too expensive.

One of the models of spotting winners is to spot stocks at or near to all time highs which on valuations also appear

You may be late in joining the party but the party may just have begun and you may not have missed much of the fun.

Hi Hitesh ,

is this more of an under valuation play based on cash on books ?

attractive.

[mohdrehan1]

Hitesh

Isnt the cash earning money for the company? If yes, then we have to deduct the non operating profit from 120 crore to get actual understanding of valuation currently??

This one is on my radar

[hitesh2710]

rehan,

valuing jb is a bit tricky.

market cap is 1050 crores… say cash on books is 550 crores…(cant be exact)

so u are getting pure pharma business for 500 crores.

Now out of cash of 550 crores they can generate max 50 crores op profit…at 9% pa interest rate. and if u deduct tax it comes to 35 crores as net profit from cash.

Total net profit for full year expected to be around 105 crores.(I am being conservative here… i expect around 120 cr total net profit). deducting 35 crores net profit from cash gives u net profit of 70 crores from pure pharma business against an enterprise value of 500 crores. (stripped of cash)… that makes it available at a hypothetical PE of 7 on pure pharma business. My feel is it can go up to atleast 10 times… that leaves another 40% upside from even current levels…

This is not the classical way of valuing a business and leaves a lot of things open to debate. But it can provide a rough idea about things.

But this is not the way markets work… Its a mad animal… Goes on both extremes of overvaluations and undervaluations according to its mood. I think current mood is towards the former…

Technically stock has given a nice breakout today… If it can close above 120-122 levels for the week, it will have breached the longer term cup and handle I described earlier with much higher targets.

[sinhalgaurav]

@hitesh2710

iamsunil

till now markets were not comfortable with cash on books of jb chem… maybe there was distrust about management.

Now it seems the fears about that are receding… And when that happens that cash adds value to the total valuation of stock.

Coming to fundamentals, JB is likely to post eps of around 12 plus for fy 14… For a company with cash of close to 500 crore and market cap of 940 crores, enterprise value comes close to around 500 crores and on that company is likely to post net profit of 120 crores. That to me doesnt sound too expensive.

One of the models of spotting winners is to spot stocks at or near to all time highs which on valuations also appear

You may be late in joining the party but the party may just have begun and you may not have missed much of the fun.

attractive.

Hi Hitesh,

Hasmanagementgivenany details details/planson deploying cash. Or do you mean the market sentiments are better and have started trusting the management just based on the price movements. I think we should apply some discount for valuing cash (20% ?) even if we trust the management, as its not going to grow as fast and plays a dampener on ROE, unless deployed well verysoon.

Also, what is the potential of their core business, is it attractive viz a viz other similar sized pharma companies. I think that will hold much more importance. Please let me know your views.

Disclosure: Have taken trading position.

[hitesh2710]

gaurav,

the change is in market sentiment towards cash as dhwanil so aptly put it up on the art of valuation thread. Now cash is being seen probably as an asset whereas earlier it was seen as an uncertainty.

management indicates in the past annual report that they will utilise cash to grow their pharma business further.

the important trigger playing out is possible improvement in margins due to the new drug pricing policy being favorable for jb … some of their main brands like rantac and metrogyl were under dpco, but now with new pricing policy they will be able to raise prices to some extent which will aid margins.

exports seem to be doing well.

I think there could be a lot of things that could go right for the company.

You can go thru the last AR and indianivesh report to get a better picture.

hitesh.

[saboo]

Thank You Hitesh ,

One question i would like to ask . How much percentage of porfolio one should add jb pharma ?

Dinesh

[hitesh2710]

dinesh,

thats an individual choice but I think if one is aggressive and has high level of conviction he can take it up to around 10% or at most 15% of portfolio.

regards

hitesh.