PL Stock Report: J.B. Chemicals & Pharmaceuticals (JBCP IN) - Event Update – Entry into high growing opthal segment - BUY

J.B. Chemicals & Pharmaceuticals (JBCP IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt. Ltd.

Rating: BUY | CMP: Rs1,619 | TP: Rs1,800

Event Update – Entry into high growing opthal segment

JB Chemical’s (JBCP) has entered into Trade Mark License agreement with Novartis Innovative Therapies AG, beginning Jan’27, for a portfolio of 10 opthalmic brands in Indian market. Initially the company will in-license all 10 brands (generic in nature) from Novartis for a period of 3 years starting Dec’23 for Rs 1.25bn and later acquire all 10 brands for a consideration of $116mn (Rs 9.64bn) payable on or before 31st Dec26. JBCP holds Rs 26bn worth of highly profitable sales (70% of total sales; including Novartis brands). In the near term we expect this acquisition to dilute return ratios, however, will be EPS neutral in year 1 and gets entry into highly growing opthal segment.

JBCP’s long term growth drivers remain intact led by 1) geographical expansion of legacy brands 2) improvement in MR productivity 3) scale-up in acquired portfolio 4) launch of new products & therapies 5) rise of contract manufacturing business and 6) improvement in FCF generation. Our FY24/25E EPS stands broadly remains unchanged. We expect EPS CAGR of 29% over FY23-26E. At CMP, the stock is trading at 27x FY26E P/E adjusted for ESOP and amortization charges. We maintain ‘BUY’ rating with revised TP of Rs1,800/share (Rs1,675 earlier) as we roll forward, valuing at 30x FY26E EPS adjusted for ESOP and amortization charges.

§ Opthal remains a progressive segment: Overall Opthalmology market stands at Rs 43bn as per IQVIA MAT Oct’23 where JBCP (Novartis brands) holds 6-7% market share. It remains the third fastest growing therapy with 3 year CAGR of 15% vs IPM CAGR of 9%. Out of 10 brands acquired, 8 brands have grown between 10%-20% CAGR in the past 3 years.

§ Margins to scale-up post-acquisition of brands: Initially JBCP will likely enjoy lower OPM, as sourcing will be done from Novartis. Post grant of perpetual license, standalone margin from this portfolio will be significantly higher than the current domestic margin profile as the company will enjoy flexibility in sourcing. Assuming mid-teens growth of acquired portfolio till FY27, acquisition cost works to be 3.5x sales. We expect JBCP to generate +40% OPM with likely EBITDA generation of Rs 1.1bn (8-10% addition to our FY26E EBITDA) from acquired portfolio post FY27. The acquisition cost works 8-9x EV/EBITDA, likely EPS neutral in year 1.

§ Concall highlights: (1) 5 of the acquired brands rank in #1 category, whereas another 4 brands in Top 3. (2) Acquired portfolio gives entry in growing space like anti-glaucoma, anti-allergic & antibiotics within ophthalmology space. Acquired brands capture Rs25-30bn of overall covered opthal market. (3) Mgmt intends to work on life cycle of existing brands and improve geographical reach to aid growth. JBCP will add 25-30% additional field force over next 15-18 months to existing 90-100 MRs; also appoint new leadership to overlook and scale this portfolio plus have full control. (4) Gross margins for first 3 years will be similar to the way that in-licensing portfolio enjoys in the industry. Operating margin profile will be significantly higher than the domestic business margins post receipt of perpetual license. (5) Mgmt cited cumulative EBITDA over next 3 years to remain at Rs 750-1000mn. JBCP will amortize initial amount paid for distribution over next 6 years (6) Trade-marks being acquired from Novartis are global trade marks and this will not have any royalty obligation. (7) Overall funding of the deal will be done through internal accrual. Currently company is net cash positive.

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