Jenburkt Pharma - Analysis Report


(Mahesh Shah) #1

Provided here is the Linkto a detailed analysis report on Jenburkt Pharma…

Rgds.

Mahesh

Contents of the Report :- Theme of the Report

Investment Rationale
Brief Industry Overview

Brief Company Overview

Management

Management Quality

Management Capability

Products Overview

Current Product Portfolio & Distribution Network

Product Strategy

Product Pipeline

Financials

Past Financial Track Record of Last 10 Years

Key Financial Ratios like RoCE, RoE & D/E for last 5 Years

Likely Future Financials

Current Valuation

Valuation Commanded by Peers alongwith Comparision of Key Financial Parameters

Conclusion

Tabular Data depicting competitive Brands, Pricing, and Overview of most of the products of Jenburkt

High Margin Products

Unique Combination a Niche Products

Other Products


(Hitesh Patel) #2

Hi Mahesh,

Thanks for your wonderful effort in putting up this report.

I had also looked at jenburkt earlier but gave it a miss and latched on to Ajanta Pharma instead. Jenburkt after going through your report looks interesting.

Few minor concerns:

1). Most of the products listed are products which have tremendous competition from other players as can be seen from the number of players manufacturing the products and there also cost competitiveness of Jenburkt does not stand out too much. So the company will always be involved in a dogfight to gain market share.

2). Dividend yield of 6% we are expecting. Now it needs to be seen what kind of dividend payout is maintained with increasing profits. If it yields 6% dividend for FY 11, it offers immense safety with good upside potential. But if div yield remains at 3.5-4% then attraction lessens somewhat.

3). The company does not have any blockbuster drug brand among all its brands which maybe in the top 5 prescribed brands in its class.(If it is there, then I dont know about it)

4). Most of the products listed are not very new products-- most of them have been in the markets since a long time. (Ajanta Pharma has this advantage of launching first time in India kind of products-- hence better growth prospects-- just to give an example, it was the first company in India to launch a drug for atopic dermatitis namely Pacroma (pimecrolimus oint) since almost 6-7 months and the next company to launch it is Biocon which has yet to get its strategy in place for the launch of the drug-- I am referring to this bcos I have a firsthand experience in this branch being a dermatologist)

In fact the above fact is what tilted the scales in favor of Ajanta (their sheer aggressiveness in launching products totally new for the markets and making a success out of it --e.g carofit an anti oxidant, its brand extension carofit ultra cream is another example)for me besides its outstanding record for past few years in terms of sales and profits

5). Coming to valuations front, at a PE of around 7 plus, although the valuations are not very demanding, still I think there are a few bigger companies again like Ajanta with similar or better valuations-- Ajanta at cmp of around 215 with expected consolidated EPS of around 38 for FY 11 is available at less than 6 PE and it is a much bigger company compared to Jenburkt. (although it doesnt have the attraction of Jenburkt like higher div yield, higher roe and lower debt)

6). Coming to a scrip catching market fancy,the relatively bigger companies like Ajanta are likely to catch market fancy earlier as compared to Jenburkt.

Having said all this I still am tempted to buy Jenburkt after going through your detailed analysis because the safety margin is good in Jenburkt and if as you say growth materialises, it makes for a wonderful combination. Thanks again for the detailed report.

PS-- Again let me stress that my points raised above are just to list the possible negatives and not to stop anyone from buying into Jenburkt. In fact I myself am quite tempted to buy Jenburkt.

Just for comparision sake I am giving last five years figures for Ajanta along with first half results.

**

LAST FIVE YEARS SALES, int paid, NPM AND NP

**YEAR MAR05 MAR06 MAR07 MAR08 MAR09 MAR10 HY FY 11 ****

** sales 179 212 241 291 322 385 21 **


** int 9 11 12 15 22 19 **

**

** NP 7 10.3 13.7 17.8 21.4 28.6 17**

Npm 4.13 4.85 5.68 6.11 6.64 7.42 8.09

What I am impressed here is the consistency in both sales and NP growth along with improvement in NPMs.

**


(Mahesh Shah) #3

Hi Hitesh,

I missed out to add possible risks to investing in Jenburkt… so enlisting them below before procedding to my comment :

(1) Jenburkt’s Low scale.

(2) Pharmaceutical industry is highly regulated and governed by a constant threat of policy decision by NPPA, DGCI, local Food and Drug Authorities and any change can have varying effect oncompany’s performance.

(3) Presence of many organized players in the industry and offerings of cheap generic products from unorganized sector is always a threat for a company like Jenburkt.

(4) Asco. moves up the value chain,itis entering the markets dominated by multi-nationals and large Indian Companies. But, then this is natural phase of growth.

(5) In case of certain products (like Nervijen), seeingJenburkt’s success, many regional companies have introduced products at low prices, which does affect the co…

Now, after enlisting the possible risks, I would like to respond to Hitesh. If we look at past I do agree with you that players like Ajanta look more attractive than Jenburkt because of their scale as well as basket of products they have. Even for that matter Bafna might look attractive because of its strategy of growth going forward. However, inspite of all these what attracted me towards Jenburkt is its business model. Infact if I would have not interacted with the management, I would have definetly leaned towards Ajanta or some other player in the space. But, the management’s strategy going forward is what attracting me towards this co.

You know at the scale at which Jenburkt is vis-a-vis other players like Ajanta, it has to strike only once whereas they need to strike everytime to extract returns for us. This is what I felt and I might be wrong… Management’s strategy is to chart on a steady sustainable growth without much leverage. They have shifted their focus completely to R&D and export markets… As you must be aware that their R&D unit got DSIR-recognition only before a year… so going forward they want this unit to be a money-spinner by introducing many first-time products in India…

Whether you are aware or not regarding their Nervijen brand i don’t know, but considering the fact that in 2004, Jenburkt was the first company in India to introduce this brand for nerve damage and within a year it became one of the most favoured brand amongst its target doctors, I feel the the capability of R&D Unit is without doubt for me… I agree that subsequent cheaper launches by other players like Mankind Pharma affected Jenburkt, but here we need to look at the focus and the initiatives of the team of Jenburkt… I am told that few unique products are under clinical trial stage and FY12 could very well see their launch thats what i feel so since management is quite tightlipped rgdg. this.

Also, management has indicated that going forward also, it wishes to distribute generously the profits earned amongst shareholders so I feel even with a 30 % payout ratio w.r.t. net profit of current year, we could easily get a 5 rs. dividend.

So, I thought that here I am having a company whose products and all might not look compelling prima facie but management is very much focussed in the business and their strategy is tocontinue growing topline if not at brisk pace then at steady pace, and side-by-sideconcentrate on R&D efforts which might yield great fruits in future… while doing all these one thing management is stressing is that it wants to turn zero-debt within few years—a surprising thing since all the companies in this space want to take debt and expand aggresively— so i put a second thought as to whether management is static or not — the answer to that was management is not static but is having a vision to concentrate on margins and only margins ---- the company don’t want to get counted amongst the herd but wants to carve out a niche image of itslef in the space ---- here, i thought that companies with a zer-debt status as well as innovative products under their kitty always get premium valuation :

Hence, I concluded that Jenburkt is the safest investment bet I can get in pharma space which might not multiply my money immediately but will give me steady returns now and if any innovation materialises then it will multiply my money in no time.

Thats why i told you that i feel that Jenburkt needs to strike only once but other players need to strike everytime to extract returns for us… All said, I must admit that Ajanta is a much better growth-play than Jenburkt

Rgds.

Mahesh


(Hitesh Patel) #4

Thanks Mahesh for the response.

I agree about the argument that it needs to strike once to get noticed by Mr Market.

I like the management speak of reducing debt and improving margins.

And the dividend yield if it materialises could offer solid downside protection.


(Hitesh Patel) #5

Hi Mahesh,

jenburkt seems to be getting noticed by the market participants. Up almost 10-12% on good volumes in a weak market. Thanks for bringing this and other stocks to our notice.

regards

hitesh.


(Hitesh Patel) #6

Mahesh,

Jenburkt has already done eps of around 10.93 for 9months of fy 11. You estimated eps of around 11.4 for full year of fy 11.

Would you be revising your estimates upwards for full yr fy 11? I think it could do around 13 per share for fy 11.

This is just an academic exercise I do with the stocks I have and would like your views since you are tracking it closely.

regards

hitesh.


(Mahesh Shah) #7

Yes Hitesh… Surely projected financials will be revised upwards as sustainance of margins in Q3 is a heartning thing… Also allocation of R&D expense in Q3 at 2.9 % of topline is a good signal and this R&D expense is 68 % of the R&D expense of FY10… The co. is I think close to launch of couple of products which we can expect by Q2FY12… Wage bill is continuosly rising with 9 monthly wage bill being 85 % of FY10 wage bill which signals either eidening of field force or recruitment of senior level personnel which signals strong foundation being built by the company…

Rgds.

Mahesh


(Mahesh Shah) #8

Niche pharma formulations company Jenburkt Pharmaceuticals Ltd. announced its Q3FY11 results on 29th Jan. 2011. Robust margin expansion continues in Q3FY11 with consistent topline growth which is likely to make FY11 the highest cash-generating fiscal year in the company's history of existence. This augurs very well for the future of the company as the company is on verge of launching a couple of innovative products in Indian market with a focus on brand-building. Given below are the highlights of Q3FY11 results :

  1. Jenburkt reported a topline of Rs. 14.57 cr. in Q3FY11 which translates into YoY growth of 17.3 %.

  1. EBITDA for Q3FY11 stands at Rs. 2.65 cr. which translates into a YoY growth of 60.6 %. EBITDA margins stand at a healthy 18.2 % which translate into an expansion of 490 basis points YoY. It is worthwhile to note here that all the three qrtrs. of FY11 have seen healthy expansion of margins which is a clear result of the company's focus on high margin products as well as pick-up in product approvals offshore.

  1. Operating Profit for Q3FY11 stands at Rs. 2.42 cr. which translates into a YoY growth of 68 %. OPM stands at a healthy 16.6 % which translates into an expansion of 501 basis points YoY. It is worthwhile to note here that all the three qrtrs. of FY11 have seen healthy expansion of margins which is a clear result of the company's focus on high margin products as well as pick up in product approvals offshore.

  1. PAT (Net Profit) for Q3FY11 stands at Rs. 1.7 cr. which translates into a YoY growth of 136.1 %. NPM stands at a healthy 11.7 % which translates into an expansion of 590 basis points YoY.

  1. For nine months ending December 2010, Jenburkt's topline stands at Rs. 42.96 cr., Operating Profit at Rs. 7.43 cr. while PAT stands at Rs. 5.08 cr. which translates into a YoY growth of 9.8 %, 93.5 % and 135.2 % respectively. It is worthwhile to note here that in the first nine months itself, company has grossed a net profit of Rs. 5.08 cr. which is even higher than entire FY10's net profit of Rs. 3.77 cr. This marks the start of an era of investments made by the company over last decade initialising bearing fruits which augurs very well for the company's financials in the medium to long term.

  1. One most important thing to note here with regards to quality of earnings reported so far in FY11 by the company is that the astonishing growth in margins is coupled with a healthy increase in depreciation and tax outgo which themselves have risen by 18 % and 51.7 % respectively. The growth has entirely come from the core business of the company without any increase in other income. The Tax outgo stands at 28.7 % of reported operating profit which vindicates high quality earning reported by the company.

  1. R&D expense for Q3FY11 stands at 2.91 % of topline which is the highest in company's history and signals stage getting set for innovative product launches by the company in FY12.

  1. Employee Cost for nine months ending December 2010 has increased by 13.6 % YoY and stands at 19.3 % of reported topline which signals strengthening of marketing network by the company as also senior level recruitment by the company for brand-building.

  1. Promoters continue to show confidence in the future of the company which is evident from a further creeping acquisition of 0.26 % equity of the company by the promoters in Q3FY11. Promoters holding in the company now stands at 44.2 % up from 43.94 % of Q2FY11 & 42.75 % of FY10.

Revision in Projected Financials :

Better than expected margins registered by the company in Q3FY11 have necessited an upward revision in projected financials of next 3 years. Here again, Considering the business traction as well as the product pipeline Jenburkt has, as also making part consideration for the fruits expected from the investments made by the company so far, we will arrive at a conservative estimate for next 3 years so that management has an opportunity to surpass them again. Financials forecast for next 3 years is given below :

FY'11

FY'12

FY'13

(in ` cr.)

Sales

55.8

74.3

99.6

EBIDTA

10.01

14.45

20.1

Operating Profit

9.2

13.1

18.4

Net Profit

6.41

9.8

14.1

It is worthwhile to mention here again the vision of the management to chart on the self-sustainable growth plan while turning a zero-debt company within few years. We expect Jenburkt to turn zero-debt in FY13 and expect no meaningful fund-raising via equity issuances unless any major expansion is planned which is not talked till date.

Based on the projected financials, Jenburkt is expected to end current FY11 with an EPS of Rs. 13.81, FY12 with an EPS of Rs. 21.12 and FY13 with an EPS of Rs. 30.4.

Likely Dividend for FY11 :

Because of the robust cash generated by the company in FY11 as also management's policy of distributing the cash handsomely amongst minority shareholders we expect a Dividend of minimum Rs. 5 per share which will mean a dividend yield of 6.1 % at current market rate of Rs. 81.9.

Outlook on the Company :

We maintain our earlier argument that it is rare to find safe companies like Jenburkt with a RoCE and RoE of 35 % + and a dividend yield of 6.1 % available at a P/E of just 5.93 and at EV/EBITDA of just 3.41 in an uncertain market that we have today. Such robust parameters are coupled with a good visibility of future growth in the form of company's focus on high margin products and brand-building as also likely launch of two innovative products in FY12. On the whiff of smallest positive trigger the stock is expected to get rerated and reach our estimated fair price of Rs. 158 very soon.


(Binu) #9

Hi, this post is off topic, I have posted this topic in “under the scanner” section, not sure if anyone noticed it except Ayush, trying to get some attention on the topic.

http://www.valuepickr.com/forum/under-the-scanner/810120465

Appreciate your views on this.

Rgds,

Binu


(J2EE Professional) #10

Not encouraging set of numbers for this quarter. Any ideas why? Also, the interest cost has increased this quarter a bit. This is the third straight quarter of both top-line and bottom-line decline… any thoughts ?


(Mahesh Shah) #11

Interest cost is not much if you compare YoY but muted topline growth is definetly a concern… As per the info available from source, it had to withdraw a couple of products from the domestic market recentlybecause ofrecent ban on certain formulations…Company is having a couple of products under R&D and they are expected to be launched in FY12…we need to monitor the launch closely.

Rgds.


(J2EE Professional) #12

recentlybecause ofrecent formulations…Company

ohh, withdrawing of formulations is certainly bad news. I wonder why they did not disclose this information to the exchanges. I know that a couple of products are to be launched this FY, but any idea if it would be in the first half or second half of the FY? Also, I am hoping that the company would soon come out with the dividend declaration.

Couple of other things (I am comparing these two sequential quarters), administration cost has halved and also the employee cost has reduced. Selling and distribution cost has also come down (not sure why), but things which i do not like to see particularly is that R&D cost is just halved in this quarter, again not sure why? a bit of variation is fine, but this variation is too much to digest. Consumption of raw material has increased and so is the stock. I was hoping for increase in employee cost as they would be gearing for the product launches and also was hoping for good R&D spend. By the way, any ideas what kind of revenues the two banned drugs were generating ?


(Mahesh Shah) #13

Hi J2EE,

As far as withdrawal of couple of products go, this was a precautionary move and was anticipated as the ban was long overdue and its not that those products are not selling at shelves currently but its just that co. has decided not to produce them any further and exhast the invesntory they already have. The same thing has happened with many majors too on similar line of products… As far as their contribution to topline goes, its not much as I am told and will not significantly impact the co.

Now, as far as your sequential comparisions goes, it is best to compare these companies annualy and I see no such negative surprises on expenses front in annual results. You need to keep in mind one thing while investing in these sort of companies that first they will strive hard to achieve a scale and once that is done you will find other things falling in place.

Rgds.


(J2EE Professional) #14

thanks mahesh. secondly any insight on the possible schedule of those two products launches scheduled for this year?


(Mahesh Shah) #15

WhenI made my first report, the lauch time was indicated as second half of calendar year 2011.

Rgds.


(J2EE Professional) #16

Has anyone done the any more analysis based on its latest annual report ?


(Anand Bhushan) #17

Hi Mahesh,

Your take on weak Q1 result.

Rgds


(Nadakarni) #18

Mahesh,

Any view on the company? At the CMP of 70, it is available at a PE of 5.18 and has a divdend yield of 5%.

Hiteshji,

I understand that you are not keen on the company given high competition in the product segment, small scale of ops, generic product category. But would you recommend this one as a short term value play ?

Regards


(Hitesh Patel) #19

nadakarni,

Jenburkt growth is quite lumpy and very slow and hence I am giving it a miss since a long time. Better options with higher growth are available in pharma space.

Unless we can detect any growth trigger, I dont see the stock price going anywhere. dividend yield will provide downside protection to some extent.

regards

hitesh.


(Mahesh Shah) #20

Agree with Hitesh on this…management has been too static and is taking a long time to deliver on the vision…it could be a steady dividend earner because of management’s stated liberal dividend policy but on business front delivery is taking a long time…

Rgds.