JB CHEMICALS -- value buy

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.

Investment theme

Jb 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 0.2.

Going 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 exports.

Looks 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 stock.

Interesting 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% stake.

disc: Initial entry into the stock at around 75 per share.



Putting up some information that I found on the web -

http://valueinvestinginpractice.blogspot.in/2011/11/jb-chemicals-classical-ben-greham-style.html – from our very own Dhwanil Desai

http://www.valuenotes.com/uploads/article_pdf/reliance_JBChemicals_10Feb12.pdf – from Reliance securities

(Maybe this is exactly what hitji is saying above :-)) but I also did a rough Lynch-style calculation for cash per share: (Cash + Investments - Long term debt)/Shares outstanding (211+298-12)/8.47 = 58.6.

So effectively we are getting this for (75-58.6) = Rs. 16.3

Hitji - how do you rate the mgmt. in terms of their execution ability? Their plans seem quite similar to what the Unichem mgmt. had said.

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Disc: I also did an initial entry around 75

Management wise I think JB Chem seem to be honest and competent. I like the way they promptly distributed Rs 40 as dividend post the sale of their OTC business.

Thanks for pointing out dhwanil’s write up. Many aspects of valuation have been covered.

Currently there seems to be a breakout from a falling wedge formation which if successful can give a strong quick upmove and hence my interest currently. It has been under the scanner for a long time but since I did not want to get into non moving stocks I waited for the breakout before taking an entry.

attached chart shows the breakout.

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I think, JB still remains a good long term opportunity offering deep value as Hitesh pointed out. Key attributes that keeps me invested are

)- Very honest and conservative management. One can make out from the calibarated moves management is taking without gettin bogged down by the cash on balance sheet.

)- Decent business. though, i would not rank it amongst the top ones in pharama space, it does shave names like Rantac, Nicardia and metrogyl.

)- Veryhealthy return ratios for lastmany years.

In all, a decent quality stock trading at substantial discount to its intrinsic value. However, one needs to remain patient till management deploys cash/additional capital in business and starts generating decent returns on it. But I am sure, market will give it due recognition as soon as the green shoots starts appearing.

Best Regards

Dhwanil Desai

Disclosure: I am invested in JB Chemicals at average price of61.

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I agree with your view that one needs to see how the growth plans pan out. To me, this seems to fall somewhat into the Pabrai low risk-high uncertainty category.

Thanks Hitesh and Dhwanil for such an excellent analysis. Already took a small position. I will be one of those rare instances, when I will be investing first and doing my own research later…

Indeed JB Chemicals & Pharma looks to be a highly mispriced bet. Thanks Dhwanil for your precise stock story. And Hitesh for bringing it to notice:). Good to note that Management Integrity is unquestionable. Managements stated position on utilisation of Cash for the business is also a big positive.

Some first-cut observations (haven’t done any diligence):

We should take the trouble of pin-pointing, the things that have changed/changing in this company, that will improve performance henceforth, and help allay the mispricing.

a) Working Capital reduction - I read somewhere that this should drastically reduce post the CIS business Sale

b) Forex Loan reduction -

c) what others

Those of you tracking/invested - Can you point us to the specifics of the improvements/likely improvements in coming quarters. What will be the sources of an improved picture. And will there be any sales growth? What will be the sources of that growth?

Also Dhwanil, can you throw some light on the characteristics of the business. If I look at the long term picture, on the face of it looks pretty unimpressive as a business - (poor sales & profit growth) especially being in Pharma (it does have some volume brands like Rantac, Metrogyl)- where most other pharma participant have left it behind. On the other hand they seem to have maintained high RoEs. Just what are the Promoters after? Looks to be a quick exit, once the mispricing vanishes??

Meanwhile we can try and establish - what will make the mispring abate?

I will read the ARs now:) and also compare notes with a friend who has been a big believer in JB Chemicals (if I remember correctly), and revert.


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Thanks to positive feedback of Dhwanil, Hitesh and near-positive feedback of Donald, I too added a small amount of JB Chemical to portfolio (near 1%). Planning to add in a staggered manner.

Hi Donald,

When I discovered JB chem it was a Graham’s classical net-net bargain hence a deep value stock. In my opinion it still remains a deep value stock. So from my perspective, as you very rightly put, It is a highly mispriced stock. At current valuation, there is big gap between the price and private value of business (value that promoters would seek if they were to sell the business to a private investor). As per my understanding, key attribute one has to look for such businesses is whether company’s business is good enough not to burn cash to bring down its intrinsic value to reduce the gap! As long as one ensures that, there is a good chance of high returns from such situations.

Before going into specifics of the JB, i would like to reiterate here that, in my opinion, JB is a decent business available at dirt cheap price. But it is a average business and not great business and hence after the gap between value/price closes, I personally would like to book profit and exit unless thecompany, in mean time, has transformed the business whereby one sees good chances of intrinsic value increasing at decent rate for a long period of time .

Coming to specifics about JB , following are my observations/analysis of JB business.

**Sale of Russia CIS business: **JB waswell entrenched into Russia-CIS market since they hand entered this market at very early stage, built strong brand and distribution network. Doktor-Mom and Rinza were primary revenue earners in OTC market. Profit marginswerethe best amongst all of JB’sbusiness segments due tostrong brand equity created by Doktor Mom and Rinza. Rx business was relatively smaller. However,Russia-CIS operationswere working capital intensive as 180 receivable days were considered normal! Considering this large requirement for working capital andhigher cost in spreading distribution network and sales/advertisement/promotion activities in the marketmade sense for JB especiallyfor the deal that theygot from J &J. Based on this primer, key fall out of sale of Russia-CIS business is,

)- Working capital requirement for the company will go down substantially leading into higher asset turnover and lower financing cost

)- Company has inked a exclusive supply contract with J&J to supply OTC products for 5 years which meant that topline impact from Russia-CIS sale will be somewhat mitigated.

)- Operating and net profit margins will come down due to relatively higher sales contribution from lower margin (doemstic formulation) business verticals.

)- Company has started a strong relationship with a MNC pharma (J&J) for supply of product which can be built upon in future for other contract manufacturing opportunities.

So post sale of Russia-CIS business, management has panned outmulti pronged strategy

)- Focus on Domestic formulation business-management expects 15% CAGR in the domestic formulationsbusiness which isrealistic and achievablegiven their revived focus on domestic business, new product developments, development of new theraputic areas (gynecology/dental) and increased field force. However, it is also equally important to realize that JB has grown only modestly in the past decade inspite of support of relatively strong brands. In my opinion,slower growth was due to conservative approach by management to grow thisperticular business.

In future,as management hasindicated, theefforts will bear fruit slowly as prescription generation is a slow process and buy in from medical fraternity/hospitals can not be achieved overnight. Hence, one must be willing to give at least 1-1.5 years after onecompany starts putting infocused efforts (which they did since last 9 months as indicated by management). Another thing to bear in mind is that new division (gynecology/dental)means higher operating/sales/promotion expenses upfront before realization starts to come from new division. So, in all for FY 13, the margins may be under pressure due to this and company may achieve modest growth in topline in this division.

)- Contract Manufacturing: JB has number of manufacturing facilities spread across locations which are approved by various regulatory agencies such as USFDA/MHRA, EU-GMP, South African and australian agencies for various types of products. JB has started contract manufacturing for J&J for supplying OTC products to Russia-CIS market. Hence, given their understanding of various forms of dosage manufacturing, they can surely tap this market. However, as I see it, this market is becoming increasingly competitive but there is enough space for new players considering increasing off patent drugs.

)- Niche Branded formulation exports: This again is a lucrative market and JB has grown in this area and can capitalize in the markets/geographies it has already entered more swiftly than any other opportunities.

)- Growing in US Generics Market: In my opinion, JB has been slow on this front and it will take some time for them to reach a stage where every year 8-10 ANDA can be filed every year (as indicated by management, which seems over optimistic to me)and based on that new products launched in US market.

In all, I see JB business doing reasonably well (12-15% growth) in near future and there after it will dependuponhow management’s effort on various fronts pan out. So, I do not see any risk of intrinsic value eroding from this point at least.In my opinion,it is low risk bet with potential returns of 80-100% from this level ( NWC + investments- Debt = 635 crores while market cap is 638 croreswhich means fixed assets + business is available for free).

for ROE/ROCE, I feel that in the past, JB’s ROE/ROCE performance wasdriven byNPM as itmaintained high profit margin therange of 15% (+/-2%)while asset turns were around 1.15-1.3 which is on the lower side for a pharma company.However post Russia-CISbusiness sale, asset turns will increase due to lower working capital requirements which will partly offset the impact of lower net profit margins on retun ratios. So, i still feel, that JB will be able to post decent return ratios in next few years.

Best Regards

Dhwanil Desai

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for the questions u put up the management has put in a lot of efforts to exactly explain what they intend to do to pursue growth.

for the rest, dhwanil has put up a very very strong investment argument. Essentially one is getting the pharma business for free. If the management walks the talk and delivers, u get a multibagger and if not there is not much downside.

Only thing to be seen is how they deploy cash. they have stated that they dont intend to buy anything in a hurry. which seems a good sign.

Till now their antics dont match those of the riddhi siddhi people but stock price seems to be reflecting them in the class of riddhi management. Thats where i think the difference lies.

And to top it all since downside seems limited one can bet harder on this one.

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Ajanta and the other pharma stocks seem to be on a downtrend and the possible reason could be the appreciating rupee,but i presume these guys must be hedging ,do you think ajanta will be able to do an eps of 40 with the appreciating rupee

Hi Donald

Hitesh and Dhwanil has explain it very well why this is a good pick. Let me try to connect this situation to the lecture on "Unknown and unknowable"by Sanjay Bakshi.(here is the linkhttp://iaip.wordpress.com/2012/03/12/understanding-the-universe-of-the-unknown-and-the-unknowable/)

  1. In this presentation he covered two companies: Trent and Piramal Healthcare, falling exactly in the same situation as JB where he explain that the big lesson here was that if you buy cheap things then even if you fail to get the value out, you could get lucky and get a handsome exit.

  2. He insist in such situation market and most investors treat uncertainty as risk, which is not correct. Uncertainty can be your friend, if you acquire it atfavorableprice.

3)The big lessons from Taleb was to organize your life so that you minimize your exposure to negative black swans and maximize your exposure to positive black swans.

I think stocks like JB need to be analysed completely differently compared to others and looking for near term triggers, sales growth may not be the correct way, as the promoters themself will take time to figure out what exactly they need to do and how to deploy the additional cash. As Dhwanil said, it should be great comfort that they are not burning cash.

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Hi everyone,

There is a significant development in JB. JB made following announcement just befor closing hours.


So what’s the impact? company holds roughly 162 crores worth cash in escrow account as per disclosures in AR 2012-13. I think what this means is that J & J is claiming this amount to be given back to them. Now management has indicated clearly that it is a dispute and legal advise is sought.

So this means, for the time being, one has to discount 162 crores from cash and bank balance for valuation. This, in my opinion, is a significant dent.We do not knowtheterms of the sale agreement between JB & Cilag (J & J)hence it is not possible to decide whether claim from J & J is tenable or not. However, generally money is put in escrow to ensure that money is not released till some obligations are fulfilled from the receiving party. So, my inference is that J & J is claiming that JB has not fulfilled some of its obligations apparently. But this is just an educated guess.

I also see colateral damage here as JB has an agreement to supply products to J &J for 5 years. If there is a legal battle, this contract can also go in a spin. I have very high regard for J & J, as its recall of tylenol in US market is still considered most appropriate case study in ethics. Again, as JB is focusing to develop contract manufacturing business, people look for healthy relationship with peers in the industry as key attribute in company. So some negative rub off may be here too… Sounding like a scaremonger? just sharing my views based on limited information. Requesting senior boarders to share their views and insights.

Best Regards

Dhwanil Desai

Discl: I am holding position in JB and not selling the position off till I get clarity on the issue.

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I think it makes perfect sense to get out of the name as it is very likely that this name would correct in short term. So you have cash being withheld. A likely cancellation of the j&j outsourcing contract as well as likely hood of new drugs being brought under price control.

Hi Dhwanil,

you seem to be a deep value kind of guy.

so let me suggest you a deep value name here

I am sure you would like SREI InfrastructureFinance

They are in equipment financing through their JV with BNP

the core business is doing well and has normalized ROE of 19-20%

(last 2 quarter numbers are notrepresentativeas they had some forex losses)

their ROE looks low as a major part of the equity/networth is tied in investment

They have some Rs. 1500 crore invested in Viom - a telecom tower company owned by Tatas

another Rs. 400 Crore is invested in high IRR road projects

The news is that Bharti Infratel is coming with IPO

news reports indicate that Bharti could command 10 to 12X EBITDA in the IPO

if we apply the samevaluationsto Viom (which is expected to do EBITDA of Rs. 1800 Crore in FY 2013)

Viom has a tenancy ratio of 2.4

The best in the industry

Srei’s stake in Viom could be valued at Rs. 1800 crore (they own a 11% stake in Viom)

Now SREI is quoting at a market cap of 1400 crores <0.5 times book

Viom could also list soon as indicated on last management conf call

even if we valued Viom at 900 crore you are getting rest of the business at a market cap of 500 crore

the rest of the business is capable ofgenerating150 crore of profit every year (excluding one offs)

their core business hasbeen showinghealthygrowth even in the current environment.

on top of that they have their own shares (treasury) worth 130 crores

just look at the presentation for the details




Thanks for bringing the issue to light as I too had made an around 75 levels , appreciate your alertness .

http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=604653 Link: http://www.moneycontrol.com/stocks/stock_market/corp_notices.php?autono=604653

dent.We do not knowtheterms J)hence

Thanks Dhawnil for bringing the issue to light. We can watch for some more time before we get clarity on this issue

As Dhawnil rightly pointed out above, this development has a material imapct on the company. What is this impact?

As Dhawnil and Hitesh had pointed out above, we were getting the pharma business free given the cash position. Now, we can assume that the business is available for Rs 160 crs which is still very cheap for a business like JB chem.

It would be hasty to assume that the supply contract with J&J is in jeopardy due to a dispute over the money in the escrow account. If the breach of contract is due to the inability of JB chem to make good on its contract to supply the formulations to J&J, then surely there would be an impact. However, if the dispute is totally unrelated to the supply contract, then J&J would find it very difficult to cancel the contract. The assumption here is that both the managements are mature and would take contract dispute as a part of doing business. I am also presuming that the supply contract has the requisite legal safeguards.

The most important factor in my mind is the country of arbitration. It would be safe to assume that both the managements were smart enough to not have the country of arbitration as Russia. If the country arbitration is Switzerland, then we can look forward to a quick and fair proceeding.

I think we need more clarity from the JB Chem management as to the reason for the dispute. In any case the downside for this company is limited and it still is a great investment.

Disc- I am invested in JB Chem.

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By looking at the chart, I feel the downside can be as low as 58-60 range. So it is around 10-15% below CMP. The risk is the uncertainty coming because of the ill-known litigation with one of the major customer, and the buyer of its business. Not much upside can be expected until things get a much better clarity. I feel one will incur some opportunity cost by remaining invested in it.

Disc: I had around 1% in JB. Sold with a minor loss and converted to GRUH finance, which to me seems to be a fairly-valued 20-25% compounding machine, with very good NPA (thanks to its parent HDFC, small size, and huge growth opportunity, and a middle class psuedo consumption play)