Jubilant Ingrevia : Aligning Verticals, Consolidating Growth (2023)

Stocks

Krishna Appala

Apr 25, 2021

Jubilant Bhartia GroupJubilant IngreviaJubilant Life DemergerJubilant Life SciencesJubilant pharmovaJUBLINGREAJUBLPHARMA

Jubilant Ingrevia : Aligning Verticals, Consolidating Growth (1)

Speciality chemicals sector is in a strong trend from past 5Y. Thanks to China’s pollution factor. Indian chemical companies leave no stone unturned to make the best use of this paradigm shift. Now we have a new kid on the block (well, not exactly a tenderfoot though).

Historically demergers from a good conglomerates tends to garner investors interest. The stock had a stellar run since its listing. So, what’s cooking in this company? Let’s try to find it out.

About the Company – Jubilant Ingrevia

Who are they?

  • Jubilant Ingrevia is part of Jubilant Bhartia group founded by Shyam Bhartia & Hari Bhartia.
  • The company was incorproated as Vam Organic Chemicals in 1978.
  • On Feb 1st 2021, the chemical business of Jubilant Life Sciences was demerged as Jubilant Ingrevia. Later Jubilant Life Sciences was renamed as Jubilant Pharmova.

*Source: Investors Presentation

What do they do?

  • They are a global player in life sciences ingredients & special chemicals. The company has clients across:
    • Pharma (35% of revenues)
    • Agro chemical (18%)
    • Nutrition (21%)
    • Industrial chemicals (23%)
  • The company has a total customer base of 1400 which includes 15 of Top 20 in Pharma & 7 of Top 10 in Agro. The company has a of total 100+ products.
  • 60% of the revenues are from Exports. The company has 5 manufacturing facilities (2 in Gujarat,2 in Maharastra & 1 in UP). The company has a pipeline of 60 new products for the next 3-4 years.

Business Overview: They have 3 major business segments.

Speciality Chemicals:

  • Globally Speciality chemicals market is expected to reach $1.1T by 2025 from current $857B at a CAGR of 6.4%. The high margin CDMO business is expected to reach $279 B at a growth rate of 9.1% every year.
  • The company has a strong global presence in products like Amino Pyridines (85% global market share), Alkyl Pyridines (60% global share), Cetylpyridinum Chloride & Azacyclonol (52% global share).
  • They have planned for a CAPEX of 550 Cr in speciality chemicals segment over the next 3 years.

Nutrition & Health Segment:

  • Post Covid, nutrition segment is fast evolving.It is a $350B opportunity which is expected to reach $618B in the next 5Y at a CAGR of 6.9%.
  • The current market size of Vitamin B3 is $350 Mn & is growing at 2.5% every year. Major applications of Vitamin B3 are in Animal Feeds (60%), Human food (25%) & the remaining in cosmetics & others. Similarly Vitamin B4 is also used as a feed supplement in Poultry, Dairy, Aqua.
  • The company is expanding its B3 capacity from current 13,000 MT/Year & launch various value added services. They have planned for a CAPEX of 100 Cr in nutrition segment over the next 3 years.

Life Sciences Segment:

  • On Life sciences, Acetic Anhydride &Ethyl Acetate are a $4.3B opportunity globally growing at 4% every year.
  • The company is among top 2 manufactures of Acetic Anhydride & Propionic Anhydride globally.Life sciences majorly caters to domestic market (70% of the revenues).
  • They are increasing the capacity of Acetic Anhydride by 35% & planning to invest 250 Cr in Life sciences segment over the next 3 years.

Financials:

  • The company clocked a revenue of 2413 Cr as of 9MFY21 up by 2% when compared to same time frame last year.
  • EBITDA has improved by 34% and stands at 418 Cr. EBITDA Margins were improved from 13% in FY19 to 17% as of Dec 2020.
  • The company had reduced its debt in the last 2 years. As of 9MFY21, the net debt stands at 529 Cr down from 1276 Cr in FY19.
  • Net debt to EBITDA stands at 0.9x. The debt had been equally shared b/w Ingrevia & Pharmova.
  • ROA is at 9.4% & ROCE of 17.9%. Promoters continue to hold 54.4% of the demerged entity.

Vertically Integrated:

  • 25% of overall volume of Life Science Chemicals is produced in-house & consumed by Speciality Chemicals segment.
  • ~45% of Pyridine & Picolines volume is used in-house for value added products in Speciality Chemicals.
  • For manufacturing of Vitamin B3, the Beta Picoline is sourced 100% from Speciality Chemicals segment.
  • This helps the company to lower the cost & reduce the dependency on markets to procure key raw materials.

Growth Triggers:

  • The management is confident of growing the revenues in double digit for the next 5 years. They are open for an acquisition opportunity in Agro chemicals / Nutrition segment.
  • Management is seeing a strong demand for Acetic Anhydride globally as they is no new supply coming.
  • The prices of acetic acid will have a direct impact on the revenues & profitability of the company. Hence the reason FY20 sales were down by -10.3%.
  • Nutrition segment will continue to be the biggest growth driver (16% YoY).
  • They will be investing in a new facility to launch 6 Diketene derivatives. The company is also looking to expand CDMO business.

Do we like it? – Yes.

The company looks promising. The financials are strong & the management guidance is positive. We are yet to see how they are going to fund the 900 Cr capex in the next 3Y (internal accruals or debt).

Given the double digit revenue growth guidance, reducing debt & increasing margins, we can expect the company to clock a revenue of 3400-3500 & a PAT of 400 Cr in the next 3 years. The stock is listed at 268 & had a stellar run since then. It is currently trading at a PE of 18 times FY21E.
Overall, the company looks as a decent bet for medium to long term.

A peek into our CM slack discussion

Q: What’s the reason growth has been poor last few years and what’s the reason to believe it will change?

CM View: Life sciences contribute 49% of the revenue. Acetic acid is the key raw material for them. This is a pass through cost for the company. However in FY20, acetic acid prices were down by -33%, resulted in clocking lower revenue.

Q: How good are the Management?

CM View: Just like other Jubilant companies, this is also run by professional management. However excluding some hiccups here & there (like proposing to charge Jubilant brand royalty for Jubilant foods & cancelling it the next day), overall it’s a decently run conglomerate.

Q: How is the outlook for their Speciality Chemicals division considering they have no major competitors in their key products. Do they benefit from planned shift away from Chin?

CM View: Specialty chemicals continue to be their growth driver. And yes, they are going to benefit from China factor. Infact that is the main reason why they are expanding into Diketene derivatives. PFA screenshot. They are launching 6 Diketene derivatives with a proposed capex of 550 Cr in this segment.

Reader RR’s view on the company:

  • Laxmi Organics seems to be a close peer especially in Life Sciences and Speciality Chemicals. No listed peer in Nutrition business. Valuations seem to be quite reasonable. One reason could be lot of erstwhile shareholders sold off post demerger.
  • This valuation gap could reduce post results and further views on Balance sheet.
  • Nutrition – Its basically a commodity product business though they have tried to move up value chain and increased margins here.
  • Debt levels could be street’s concern, thereby giving this a lower valuation. Previously, demerged entity in 2012-13 have had high forex debt levels. Management has an appetite for debt but they seem to be have turned smarter in their asset allocation plans.
  • Current debt seems manageable , though complete details on BS are awaited before forming a final view on debt levels. This is a key issue that needs to be monitored especially with the upcoming 900 Cr capex plan.
  • Acetic acid RM price movements are also a key monitor.
  • Company has taken a lot of steps in backward integration of operations and focus seems to be on increasing margins and not just top line.

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