From Research Desk

Jubilant Organosys Limited
Result Update (Q3 FY07)

Jubilant Organosys Limited's (Jubilant) Q3 FY07 sales increased by 11.2% to Rs4.69bn driven by continued growth momentum in Pharmaceuticals and Life Science division (PLSC), which comprises high growth, segments like CRAMS, API's, drug discovery and formulations. Lower than expected sales were due to a 3.3% decline in the Industrial Products segment attributed to one-time merchandise sales of alcohol in Q3 FY06. Normalized growth stands at 18.6% for the quarter. Operating profit margins expanded by 383bps to 19.1% on account of strong volume growth in PLSC, favorable raw material cost scenario and savings on S,G&A front. Robust margin expansion and contribution of other income has led to 74% bottom line growth to Rs637mn, translating into an annualized EPS of Rs14.1 on a fully diluted basis.

Jubilant is well placed to deliver revenue CAGR of 22.9% to Rs22.75bn over FY06-08. PLSC division estimated to account for 57% of sales in FY08 has all its growth drivers in place while the non-pharma divisions will continue to generate cash flows for investment in PLSC. We estimate operating margins to expand by 520bps to 19.6% over the next two years driven by higher contribution from PLSC division and a favorable material cost scenario. Consequently earnings are likely to witness CAGR of 50% to Rs2.9bn over FY06-08. At Rs259, the stock is trading at 19.9x FY07E EPS of Rs13.0 and 16.2x FY08E EPS of Rs16 on a fully diluted basis. While the growth drivers are in place, we believe the market has factored in all the positives from the stock. Our target price of Rs275 at 17x FY08 earnings leaves an upside potential of 6.2% from current levels. We recommend a HOLD on the stock.

Jubilant has decided to venture into the healthcare space and has earmarked Rs800mn over a period of two years for this project. The management has indicated that they would be sharing further details about this venture over the next 2-3 months. We shall revisit our estimates post this announcement.

Reliance Industries Ltd. (Q3 FY07)
Rating: BUY

Reliance Industries Ltd (RIL) reported Q3 FY07 PAT of Rs28bn, which was significantly higher than our estimates of Rs23.3bn. The earnings surprise is primarily on account of a stellar performance posted by the refining segment of the business. RIL earned a GRM US$11.7/bbl as against US$9.1/bbl in Q3 FY06. However, the petrochemical business witnessed some slump in EBIT margins due to higher depreciation and rising feedstock prices for the polyester business. Production from the Panna-Mukta-Tapti fields have increased and there is a greater clarity on the KG-D 6 production status, as the field is all set to commence commercial production from second half of FY09. Reliance Retail business kicked off in the quarter and currently operates 24 retail outlets in Hyderabad and Jaipur. We believe that in the years to come, contribution from the high margin E&P business to revenue and profitability will increase substantially, thus reducing dependence on highly volatile and unstable business of Refining and petrochemicals. Our sum of parts valuation gives us a target price of Rs1,499 providing an upside of 8.5% from current levels.