JB Chemicals - Normalised Growth To Dampen Earnings Flare Up; Downgrade To 'Reduce': Yes Securities

Yes Securities Report

We assess the potential triggers ahead for margin expansion and sustainability of acquisition-led high growth phase of last one year for JB Chemicals and Pharmaceuticals Ltd.

A large part of growth catch-up in acquired brands is complete as Sporlac, Azmarda scale up towards Rs 850 million-one billion brands each.

Moreover, contract manufacturing which has more than doubled over past three years would have included tailwinds for medicated lozenges in the pandemic; since gestation period is long for new product introduction and onboarding new customers (renewed traction only after Q4 FY24), reckon CMO segment might consolidate or struggle in FY24 which would also dampen the incremental Ebitda growth from CMO.

Additionally, margin expansion lever appears weaker after completion of growth catch up especially as input costs have not declined significantly since Q4 FY23.

We note FY24/25 earnings growth is already factored at 30% compound annual growth rate leaving little room for disappointment; downgrade to 'Reduce' as likely tepid Q1, lack of earnings surprises preclude any price-earnings rerating.

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