Why this Jhunjhunwala stock is seeing rating downgrades

Rakesh Jhunjhunwala‘s portfolio bet Jubilant Pharmova is under pressure, so much so that the scrip has eroded half of investor wealth in the last one year.

To add to the woes, December quarter results missed analyst estimates on most fronts, thanks to the impact of import alert, voluntary withdrawal of Losartan, continued tapering of Covid-related one-off deals in contract manufacturing business and pricing pressure in the US generics market.

A few analysts believe revenues have bottomed out for this drug maker, others do not hold high hopes in the short term.

Jhunjhunwala, meanwhile, has maintained a status quo on his holding in this firm at 6.3 per cent for the last four quarters.

Revenues for December quarter tanked 26 per cent due to a sharp fall in generics and API segments, and tapering of covid-related opportunities in contract manufacturing business.

Adjusted profit declined 77.8 per cent YoY, with Ebitda margin shrinking to 14.8 per cent compared with 20.5 per cent in September quarter and 27.8 per cent in the year-ago quarter.

ICICIdirect has downgraded the stock to ‘hold’ from ‘buy’, as it believes the near- to medium-term growth would remain under pressure due to continued delay in radiopharma recovery, regulatory issues and pricing pressures in the US.

The brokerage has cut its earnings estimates by 17 per cent each year for FY23 and FY24 to factor in price erosion in the US, higher-than-expected impact of import alert, and delayed recovery in radiopharma business with reduced profitability.

“We also cut the multiple from 16 times to 14 times amid blurred near-term visibility,” it said while suggesting a target of Rs 550 on the stock.

Motilal Oswal Securities has also cut its rating of the stock to ‘neutral’, given the weak demand scenario in the Radiopharma business and intensifying competition in the generics business, coupled with regulatory concerns. Reduced operating leverage would further weigh on return ratios, it said while suggesting a target of Rs 550 on the stock.

In February 2021, following the demerger of the life science ingredients business, Jubilant Life Sciences was renamed as Jubilant Pharmova. In July 2021, Jubilant’s Roorkee-based manufacturing facility was issued import alert by USFDA, affecting its exports to the US market. Besides, an arm’s fully-owned subsidiary recalled products from the US market a few months later.

Jubilant Pharmova, which deals in specialty pharma, contract development and manufacturing organisation and generics, derives 75-80 per cent of its revenues from the US market.

“Overall, in the near term, the company’s prospects remain dim; the generics business is unlikely to bounce back to FY21 level. Re-launch of sartan products in the US should help them recover on a QoQ basis, but the impact of lower contribution of Covid products and lower sales in the US — due to import alert, should sustain,” said Nirmal Bang Institutional Equities.

Injectable contract manufacturing business should see residual sales from the Covid portfolio taper off, it said, adding that the additional capacity addition in the CMO business should only come into play by FY24 onwards. “Hence, in the near term, growth will be subdued,” it said while suggesting a target of Rs 515.

JM Financial, meanwhile, is hopeful. It noted that the company has taken measures to mitigate erosion

like increased production from Roorkee facility for non-US markets, sartan relaunch and is expecting remediation of Roorkee facility in H1 2022.

“We believe that the company’s revenues have bottomed out and will see sequential improvement hereon despite persistence of above mentioned headwinds,” it said while suggesting a target of Rs 735.

The company management, meanwhile, has received shareholder nod for demerger of API business and is optimistic of completing the reorganisation by March quarter.