JB CHEMICALS -- value buy

@hitesh2710: Hitesh bhai are you still holding the stock or tracking it.

Appreciate your opinion on the same.

Regards,
Bharat

Team,

what is the use of this evoting thing which we get on our emails? pls advise
is it like a ballot?

Dhwanilbhai and HiteshBhai,

I have bought JB Chemicals and the stock has not sen much movement for last 2 years. But there now seems to be a lot of activity on the counter.

Can you offer your suggestions…

Warm regards,
nitin

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Q3 Results : From Press release :
The decision taken at the beginning of the year to create additional divisions in
domestic formulation business, to support newer products and increase feet on the
street is showing good results. Barring the impact due to GST, sales have done well.
The Company now plans to do similar exercise in the coming year to further increase the number of representatives by about 250 and support them with newer
products. This plan is expected to be operational from April 2018.
 Favorable product mix has aided better margins in domestic formulations business.
EBITDA for the quarter at 19.61% vs 16.93% in Q3 last year.
 Despite strong Rupee against US $, higher manpower cost due to increase in
domestic field force and higher depreciation, profit before tax registered 23.81%
growth YoY.
 During quarter ended on December, 2016, Provision for tax was lower as the
Company was liable for tax on book profits under MAT provision of Income Tax
Act, 1961, which in current year is not applicable.
 During the quarter, US FDA approved Company’s Supplementary Abbreviated
New Drug Application (sANDA) for Atenolol Tablets USP 25 mg. 50 mg. and 100
mg. (anti-hypertensive) manufactured using Company’s own bulk drug (API).
 During current quarter, the Company plans to file one ANDA for anti-convulsant
tablets. The Company’s 5 ANDAs are pending approval by US FDA.
 Recently, Medicines Authority of Malta has accorded its approval to the
Company’s manufacturing facilities at Panoli, Gujarat for tablets, capsules, liquids
for internal use and semi-solids. This approval is valid in entire European Union.
This will help in growth of contract manufacturing business.
 The impact of lower sales in the first quarter continues to weigh on the YTD
numbers, which still continue to be lower than the last year.

I have been reading up about JB Chem & Pharm & following are some notes -

The company caught my eye because fixed assets had gone up from 370Cr in FY16 to ~600Cr in FY18. As @hitesh2710 bhai says, so much capex has come from a management that has track record of being conservative.The company has net cash of ~400Cr against market cap of ~2400Cr. Further management did buyback at 400Rs. in FY17.

So this is an attempt to connect the dots.

NUMBERS

  • The margins got hit in FY18 due to higher staff cost for newly hired MRs, one time impact of ~10Cr, incremental tax due to GST, higher depreciation & strong rupee.
  • The operational ROCE of the company has been in the range of 20% for last 3-4 years. Its the return on investments that is bringing down the overall ROCE. As capital moves from investments to operational assets, I am hoping for good growth in PAT.

BUSINESS
The company has four lines of businesses - namely Domestic Formulations, Contrast Media, Global Business & API.

DOMESTIC FORMULATIONS
The web page of company provides pretty decent details about the India business.
https://www.jbcpl.com/business_units/india.html

There are following interesting points about this business.

  • The company has about 108 brands in the domestic market with some of them are leaders in their segment. Few of the brands of the company are in top 300 pharma brands in India.
  • The major ones are - Rantac (stomach acid reduction), Metrogyl & Cilacar (high blood pressure treatment). Some other brands are Nicardia, Dicloran, OF. I would be happy if doctor community on VP shares feedback about these brands. Cilacar has generated 100Cr sales in FY17.
  • The company had hired ~600 MRs in Q4FY17 and there are total 1400 MRs on payroll.

The domestic business has grown at ~15% CAGR over last 5-6 years. With aggressive hiring of MRs, the operations & sales might grow. The company has decent history of creating brands & I hope this gives some kind of sustainability to sales & margins.

CONTRAST MEDIA
Contrast media are radio-opaque structures that are used to study internal structures of body in X-ray.
https://www.jbcpl.com/business_units/contrast.html

Contrast media is a tender based business with intense competition. This business contributed 44Cr in sales over last 2-3 years for the company. The company is present in both domestic as well as international markets. The company is amongst top 3 players in this field.

GLOBAL BUSINESS
This business consists of further sub-businesses - US Generic Business (ANDA), Branded Generics, Contract Manufacturing & Contrast Media.

The business has shown degrowth in last 2 years but it was growing at decent pace before that. Currently revenue contribution in FY17 is approximately as follows - Russia (61Cr), South Africa (189Cr - 343million Rand), US (100Cr - 15.57million USD), API (91Cr)

Russia (LLC Unique Pharma Laboratories) - 61Cr Sales FY18

  • The company is primarily into prescription products business after selling OTC products business to Cilag, a subsidiary of Johnson & Johnson.
  • Currently 7 products are under registration & company was planning for 4-5 more registrations in FY18.
  • Focus areas - Derma, Cough, Cold, Gastro & Contrast Media

South Africa (Biotech Laboratory Limited) - 189Cr sales FY17

  • The company markets pharma products to public, private & veterinary hospitals.
  • The company was amongst top 15 pharma companies of South Africa as per AR14.
  • The company acquired 44 dossiers from Canadian company in SA market.
  • Products - Cardio Vascular, Gastro, CNS, Derma & Anti-microbials

Contract Manufacturing

  • The company continues to manufacture & supply OTC products to Cilag GmbH (J&J) on cost plus basis.

The company is trying to increase US generics business, win more orders for contract manufacturing & try to rebuild & regrow Russia business. In SA, company has increased stake to 95% in Biotech in FY16.

API BUSINESS - 93Cr sales FY18

  • Exports accounted for 91Cr in FY17
  • Products - Atenolol USP, Cilnidipine, Diclofenac Acid

Apart from this, company has Lozenges capacity of 100 million tablets per month.

CAPEX

  • The company has two manufacturing facilities - Panoli, Gujarat & Kadaiya, Daman
  • The company has added a new facility at the cost of 175Cr at Panoli with additional capacities for tablets/liquid ointment, vials, eye drops.
  • The new facility will be focused on US & regulated markets.

MANAGEMENT
Old guard: J B Mody, Shirish Mody, Dinesh Mody
New Guard: Pranabh Mody, Nirav Mody
Bharat P Mehta??

TRANSACTION with CILAG, J&J

  • The company sold Russia OTC business (sales force + brands) for 761Cr to Cilag, J&J in FY12.
  • In that year, company paid out 400Cr as dividend + dividend tax. In my view, this shows management’s intent to share wealth with minority shareholders.
  • There was a dispute with J&J regarding amount in escrow account which has been widely discussed in this thread. What is interesting it, the dispute got settled for 65Cr for in FY14 & company managed to keep the supply contract with J&J.
  • Another interesting point I found that - management has exercised enormous patience & caution in deploying additional capital in the business. They did not do any acquisitions, did not do capacity expansions in haste as pharma bull was in full swing in FY12-14. In FY14, first time they mentioned the intent to do 175Cr capex which they did over next 2 years.

RISKS

  • Forex Volatility (especially Ruble) remains one of the decent risks to the business. In FY15, Ruble depreciation impacted the numbers by 14Cr. The number was 18Cr in FY16. The sales were hit in FY17 & FY18 as well.
  • NGT Order - On 8 Jan’16, NGT decided that environmental clearance for API unit at Panoli was bad in law & unit was closed. The company claimed that they had valid clearance. The case is now in supreme court. The issue was not mentioned in AR17.
  • The company is trying to focus & grow sales from US generics but we all know about intense pricing pressure that exists in that market. Similarly, company has not managed to scale Russia business for last 3-4 years.
  • Drug price capping in domestic market
  • The company has been talking about growing sales from contract manufacturing for last 3-4 years but they have not mentioned any significant order wins from new customers in the ARs at least.
  • It has been almost 2-3 years since capex has been ongoing & > 6 months for newly hired MR force. The expected disproportionate jump in sales is yet to materialize.

Disc - I hold, < 5% of portfolio, I have bought shares of the company in last 90 days. This is not a buy/sell recommendation & investors are advised to do their own due diligence.

24 Likes

Brilliant sum up. I was looking for a pharma business with India centric model. Since India biz now contributes almost 45% of the sales and the management seems to be focusing on it, I am a little perplexed with the slow growth there. They increased their MR count by 600 people to 2400 if I am not wrong. That should have atleast added some numbers to the growth but it isn’t visible in FY18 numbers.They showed meagre 10% odd sales growth for the year. The management is planning to add 250 MRs again in the first quarter and I hope we see some results this year of the 600 MRs added.
Also, is their any way to know the margins of India business? If the management can scale the business then we may be paying the price of just India biz at the net value of 2000cr (2400-400cr Cash). I compared the values of Eris’s India business to get some idea on how a growing india centric business is valued by the stock market. Eris is given 12X market cap to sales and I am just giving closer to 4.

Hi Rupesh,
Nice Sum up.
Bharat Mehta is Brother in Law of Mody Brothers. Son Jay Mehta will be part of new guard along with Pranabh and Nirav Mody.

Explosion/Fire at API Plant at Panoli, Gujarat

Any update on the damage caused by the fire ? If any one has so please do share. I have not seen any announcement by the company to the exchanges. Thanks in advance

https://rlshumancare.com/explosion-at-api-plant-at-panoli-gujarat/

Don’t know the authenticity of this link but it mentions that there have been serious casualties… Didn’t find the same information in any other news… Neither management mentioned

Update on the BSE about the fire accident… Prima-facie looks like not a major impact both on Topline and bottomline.

Results - EPS of this quarter is 5.03

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Company is doing well and what’s more commendable about their results is, they operate in very old molecules. Wonder how they manage to grow.
Although doing well, the company may go unichem way if they get right valuation.

They manufacture api for their main brands which is a plus and help securing already low margins in old products.

JB Chem to consider share buyback on August 31

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JB Chemicals approves buying back 3.99% of company at Rs 390/sh

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Update from recent US FDA inspection
28265475-cb1d-4589-934a-f1ca09608283.pdf (26.2 KB)

Q2’19 results
https://www.bseindia.com/xml-data/corpfiling/AttachLive/6c076f17-8998-4cfc-b08d-40eaf1c6ab3f.pdf

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Is anybody following the news where in the directors and promoters sold their stake in the company last week … i am not sure why … they are doing significant buybacks on one hand and selling on the other hand…

Promoters participated in the buyback…that’s all

https://www.bseindia.com/xml-data/corpfiling/AttachLive/9170594c-9327-471b-ba05-401e80a1f3e8.pdf