Jubilant Organosys J O L I N

H E AL T H C AR E & P H AR M AC E U TI C AL S | I N D I A

Initiating
NOMURA FINANCIAL ADVISORY AND SECURITIES (INDIA) PRIVATE LIMITED

Saion Mukherjee Avinash Ghalke

+91 22 4037 4184 saion.mukherjee@nomura.com +91 22 4037 4197 avinash.ghalke@nomura.com

BUY
Closing price on 1 Feb Price target Upside/downside Difference from consensus FY11F net profit (Rsmn) Difference from consensus
Source: Nomura

Action We initiate coverage on JOL with a BUY and 12-month price target of INR448. JOL has diversified businesses across pharmaceutical and nutritional products, Pharma outsourcing services, industrial & agriculture chemicals and polymers. JOL is well placed to address growth opportunities in each business segment. Diversification, scale and vertical integration are JOLs key strengths. Catalysts Increased traction in the contract manufacturing business through execution and signing of new contracts, pick-up in radiopharmaceutical sales and disclosure on orderbook positions across the businesses. Anchor themes JOL is a play on multiple themes: 1) pharmaceutical R&D and manufacturing outsourcing; 2) growth opportunities in Pyridines; Vitamin B3 on account of cost competitiveness; and 3) expanding healthcare and generic opportunities.

Rs322.7

Rs448.0
38.8% 18.3% 4,496 -16.9%

Nomura vs consensus
Our price target is nearly 20% higher than consensus, since we believe JOL will deliver sustained growth with a rise in profitability.

Healthy, wealthy and wise

A successful business transformation
JOL has transformed from being a manufacturer of industrial and utility chemicals to an integrated pharmaceutical player. Acquisitions have played a key role in this transformation. JOL has moved up the value chain, with an expanded product and services offering.

Key financials & valuations

31 Mar (Rsm n)
Revenue Reported net profit Normalised net profit Normalised EPS (Rs) Norm. EPS growth (%) Norm. P/E (x) EV/EBI TDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) Earnings revisions Previous norm. net profit Change from previous (%) Previous norm. EPS (Rs)
Source: Company, Nomura estimates

FY09 FY10F FY11F FY12F

35,180 2,832 2,832 19.19 (31.0) 19.7 14.6 3.8 0.5 22.4 275.8 38,059 4,040 4,040 27.38 42.6 13.8 10.3 2.9 0.6 27.7 198.8 na na na 44,334 4,496 4,496 30.48 11.3 12.4 8.6 2.3 0.6 24.2 152.1 na na na 52,213 5,488 5,488 37.20 22.1 10.1 6.9 1.9 0.6 23.6 113.0 na na na

Strengths: diversification, scale and vertical integration

Through diversification, we think JOL has substantially de-risked its business model and seeded itself well for growth opportunities across segments. Scale and vertical integration, particularly in industrial chemicals and pyridines, have helped the company attain cost competitiveness, in our view.

Share price relative to MSCI India

Businesses presents significant growth opportunities

In Pharmaceutical products and services, the opportunity is in significant patent expiries and the need of innovator Pharma players to outsource R&D and manufacturing. In the case of pyridines and chemical businesses, we think it is cost advantage that presents scope to gain market share. Our view is that JOL has built up capacities and skill sets to address these opportunities.

(Rs) 409 359 309 259 209 159 109 59 Feb09 May09 Jan09 Mar09 Apr09

Price Rel MSCI India

160 140 120 100 80 60

Jul09

Aug09

Sep09

Jun09

Robust growth outlook. Initiating with a BUY

We forecast revenue CAGR of 14% over FY09-12F. We project marginal improvement in core EBITDA margin, translating into earnings growth CAGR of 24% over FY09-12F. We initiate with a BUY call and 12-month price target of INR448. The stock is trading at 9x FY11F core EV/EBITDA and a P/E of 12.4x FY11F. These are, in our view, attractive valuations for the growth profile and profitability.

Absolute (Rs) Absolute (US$) Relative to Index Mark et cap (US$mn) Estimated free float (%) 52-week range (Rs) 3-mth avg daily turnover (US$mn) Stock borrowability Major shareholders (%) Promot er
Source: Company, Nomura estimates

1m (5.0) (4.0) 0.9

Dec09 3m 42.9 46.1 40.0

Nov09

Oct09

6m 68.0 76.2 60.3 1,040

0.0 349.0/85.5 0.72

50.8

Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 29 to 32.
Nomura 1 3 February 2010

Jubilant Organosys

Saion Mukherjee

Contents
Executive summary 3

Successful business transformation with increased focus on Pharmaceutical and Life Sciences 3 Key strengths diversification, scale and vertical integration Well seeded to address growth opportunities Robust growth outlook Initiating coverage with BUY, 12-month price target of INR448 Risks to our view 3 3 3 4 4

Company background Business structure

Proprietary Products & Exclusive Synthesis Active Pharmaceutical Ingredient (API) Contract Manufacturing Operations (CMO) Drug Discovery and Development Services (DDDS) Specialty Pharmaceuticals Generics Life Science Chemicals Nutritional Products Niacin/Niacinamide (Vitamin B3) Healthcare Agri & Performance Polymers

5 6
7 9 10 13 15 16 17 18 19 19

Strong earnings momentum

We expect a revenue growth CAGR of 14% over FY09-12F Stable EBITDA margins from here Expect strong earnings and cashflow over FY09-12F Capex lined up for capacity expansion FCCB liability to be met through internal accruals Leverage still high, but likely to come down Return on equity to remain at 21-25%

20
20 20 21 21 21 22 22

Attractive valuations
Share performance Peer comparison

23
23 24

Financial statements

25

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Moving up the value chain

Executive summary
Successful business transformation with increased focus on Pharmaceutical and Life Sciences
JOL has successfully transformed from being a manufacturer of industrial and utility chemicals to an integrated pharmaceutical player. In pharmaceuticals, the companys interests span generic formulations, specialty products, Active Pharmaceutical Ingredients (APIs), Drug Discovery services, Contract Manufacturing and Healthcare. The companys strength in pyridine chemistry formed the basis of its forward integration into all sub-segments of the pharmaceutical industry. Later on, through acquisitions, the company scaled up its contract manufacturing business with a primary focus on injectables and added specialty pharmaceutical product business to the portfolio. In discovery services, JOL has moved up the value offering from a plain vanilla Full Time Equivalent (FTE) model to a collaborative model. JOL has signed collaborative deals with innovator Pharma and biotech companies establishing the credibility of its service offerings. JOL has emerged as the largest Indian contract research and manufacturing player.
JOL has significantly improved product and service offering across business segments; the largest player of its kind in India

Key strengths diversification, scale and vertical integration

The three key strengths of JOLs business are diversification, scale and vertical integration, in our view. Through diversification into pharmaceutical and life sciences, we believe JOL has substantially de-risked the business model and positioned itself to address growth opportunities across the pharmaceutical value chain. We believe the diversified business model presents stability to growth and margins. Vertical integration and scale allow JOL to be cost competitive and gain market share in various segments. JOL is one of the largest players in acetyls in India, a raw material used for production of pyridines. In pyridines, JOL has emerged as the largest player in the world with extensive chemistry skills and a large basket of pyridine derivatives. In an effort to move up the value chain, JOL is investing in capacity for production of Vitamin B3 equivalent to almost 35% of the existing worldwide production capacity. For Vitamin B3, JOL will be vertically integrated as the key raw material Beta picoline (a pyridine) is produced in-house.
JOL is one the largest players in pyridines worldwide

Well seeded to address growth opportunities

For JOL, growth opportunities arise in both external market condition and internal strengths. In the case of Pharmaceutical Services and products (this includes API, generics, specialty pharmaceuticals and Drug discovery and development services) the opportunity is presented by external market conditions. The opportunity arises on account of significant patent expiries and the need of the innovator Pharma to outsource R&D and manufacturing. JOL has set up capacities in generics, API and contract manufacturing and has gained traction with several large pharmaceutical companies for outsourcing deals. In the case of pyridines and chemical businesses, the company is banking on cost advantage because of scale and vertical integration. This allows JOL to gain market share and strengthen its position. As a result, the company expanded/is expanding capacities in Acetyls, Pyridines and Vitamin B3.
JOL to address opportunities in pharmaceutical outsourcing, generics

Robust growth outlook

We estimate a revenue CAGR of 14% over FY09-12F. We believe JOL has, over the years, developed customer traction and scaled up a business that will drive growth. The key drivers of growth for the business are Contract Manufacturing (CMO), Pyridine, Nutritional Products (Vitamin B3), Specialty Products and Drug discovery and development services. EBITDA margins have stabilised and we expect them to expand as the companys business mix changes. This should translate into an earnings growth CAGR of 24% over FY09-12F. We estimate JOLs ROE will remain in a range of 21-25% over FY10-12F.
Key growth drivers: Contract manufacturing, Pyridines, Nutritional products, Specialty Products, Drug Development Services

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Initiating coverage with BUY, 12-month price target of INR448

Our 12-month (March 2011) price target for JOL is INR448, based on 9x one-year forward EV/EBITDA multiple, with FY12F core EBITDA estimated at INR10.8bn. Prior to the market correction in late 2008, the stock historically traded in a band of 9-11x one-year forward EV/EBITDA. After the correction last year, the stock has re-rated to 9.5x one-year forward EV/EBITDA. Given the volatility in commodity prices, the slowdown in outsourcing following the economic crisis and slower-than-estimated ramp-up in radiopharmaceuticals, we believe the valuation range may be lower, at 8-10x, in the near term. We think, however, the stock can re-rate back to 9-11x once concerns regarding the above subside. Our target multiple of 9x is the mid-point of the 8-10x valuation range, and is in line with the trading multiple of the peer group. Our price target presents potential upside of 38.8%. We initiate coverage with a BUY rating.
Price target set on middle point of trading range and is in-line with peer average

Risks to our view

Risks to our estimates and price target include: Foreign exchange movements, commodity price movements, radio-isotope supply, and regulatory changes.

Foreign exchange risk

The company derives a large part of its revenues through exports and operations outside India (64% in 9M FY10). As a result, currency movement poses a risk to our estimates and price target. However, the impact of currency movement should be limited by: 1) natural hedge, since more than 20% of revenues are from business located outside India and which incur costs in foreign currency. This includes CMO, Specialty Pharma, Generics and part of DDDS business; 2) import of raw material. As per the FY09 balance sheet disclosure, 36% of the standalone material cost was imported; and 3) a prudent hedging strategy. In the recent past, despite significant volatility in currencies, we find JOLs EBITDA margin has been stable.
Natural hedge to limit the impact from currency movement

Commodity risk
The company uses and supplies commodity products that are subject to price movements in the global market. This will affect the realisation of margins, hence profits for the company.

Isotope supply risk

We are also building in revival of growth in the Specialty Product business on resumption of supply of radio-isotopes from 1Q FY11F. A delay in availability of radioisotopes would present a risk to our earnings forecasts. A quarters delay in availability of radio-isotope poses less than a 5% hit to our earnings projections, we believe.
We assume supply issue of radioisotope supply to be over by 1Q FY11F

Regulatory risks
Regulatory risks pertain to manufacturing, product quality and approval primarily of pharmaceutical products. Regulatory action could lead to disruption in supplies and/or cancellation of contracts. Pharmaceutical products and services account for 88% of FY10F revenues.

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

The company

Company background
Jubilant Organosys, formerly known as VAM Organics, was incorporated in 1978 and was primarily a manufacturer of industrial chemicals (mainly acetyls) until the early 1990s. The company has chosen the organic route for production, which is a costeffective approach in a high crude oil price scenario. In the mid-1990s, the company embarked on forward integration into pharmaceuticals. It began with contract research and manufacturing of pyridine and pyridine derivatives, both of which use acetyl as the key raw material. The companys strength in pyridine chemistry formed the basis of its further forward integration into APIs and formulations. Pyridines currently form the building blocks of around 230 APIs, and are one of the preferred building blocks for various new products under development. JOL has expanded its pharmaceutical business mainly through acquisitions. In 2002, it acquired Max Indias USFDA-approved Active Pharmaceutical Ingredient facility in India. In 2004, it followed that up with the acquisition of PSI and PSI Belgium. PSI represents a front end for JOL to provide end-to-end services such as development and licensing of dossiers and tie-ups for supply of APIs and formulations in the EU. JOL entered the US formulations market in July 2005 with the acquisition of Trigen. The company now has a US FDA-approved facility in the US. And, finally, JOL entered into contract manufacturing (mainly injectables) and specialty pharmaceutical business through acquisition of Hollister Stier in 2007 and Draxis in 2008. In addition, JOL has interests in drug discovery and development services through its three subsidiaries Biosys, Chemsys and Clinsys. JOL is one of the few Indian companies to provide endto-end services such as early stage discovery services, chemical synthesis and clinical services under one roof. JOL also acquired Target, a US-based clinical research organisation, in October 2005 in an effort to expand clinical trial business.
Acquisitions have played a key role in business transformation

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Corporate breakdown

Business structure
Exhibit 1 depicts JOLs business segments. JOL is structured broadly under two business segments: Pharma Life Sciences Products and Services (PLSPS) Agri and Performance Polymer (APP)

Exhibit 1. JOL business segments

Jubilant Organosys [INR 35.2bn]

PLSPS [INR 29.8 bn, 84%] Custom Research and Manufacturing Services (CRAMS) [INR 19 bn, 64%] - Pyridines [INR 9.2bn, 48%] - Active Pharmaceuticals Ingredient(API) [INR 2.5bn, 13%] - Contract Manufacturing Operations(CMO) [INR 4.9bn, 26%] - Drug Discovery and Development Services(DDDS) [INR 2.4bn, 13%] Pharmaceutical Products [INR 3.1bn, 10%] - Specialty Pharmaceuticals [INR 1.9bn, 63%] - Generics [INR 1.1bn, 37%] Life Sciences Chemicals [INR 5.9bn, 20%] Nutrition Ingredients [INR 1.7bn, 6%] Healthcare- Hospitals [INR 56mn, 0.2%]

APP [INR 5.5bn, 16%] Agri-Products [INR 2.6bn, 47%] - Single Super Phosphate - Agro Chemicals Performance Polymers [INR 2.9bn, 53%] - Consumer Products [INR 952m,33%] - Application Polymers [INR 840m,29%] - Food Polymers [INR 484m,16%] - Latex [INR 651m,22%]

Note: Revenue numbers and percentages based on 2009 data Source: Company data, Nomura estimates

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

In the following sections, we provide details on the business segments. Over the years, the company has drawn a greater share of its revenues from the PLSPS business. Exhibit 2 shows this change in the business mix.

Exhibit 2. Change in business mix

Revenues (INR bn) 50 45 40 35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010F 2011F 2012F PLSPS (LHS) APP (RHS) APP (LHS) PLSPS (RHS) Growth (%) 70 60 50 40 30 20 10 0 (10) (20) (30)

Source: Company presentation

Management has indicated that it plans to separate the Pharma and Life Sciences Products and Services (PLSPS) and Agri and Performance Polymers (APP) businesses into two separate and listed companies. Under these plans, the APP business would mirror the stock holding of the parent company.

Management has indicated separation of the APP business, which will also be listed on the exchanges

Proprietary Products & Exclusive Synthesis

Proprietary Products & Exclusive Synthesis (PPES) is the largest segment, contributing 24% of revenue in FY09. The business includes pyridines, picolines, cynopyridines, Niacinamide (also referred as Vitamin B3) and various other derivatives. These products are primarily used in pharmaceutical and agro-chemical industry as pyridines serve as basic building blocks for 230 molecules. As shown in the Exhibit below, most of the pyridines are used up in agrochemicals, which account for 40% of pyridine consumption. Beta picoline is used for production of Niacin/Niacinamide (Vitamin B3) accounting for 36% of consumption. Alpha picoline is used for production of 2 Vinyl pyridine as a component of styrenebutadiene2-vinylpyridine terpolymer latexes (SBV latexes) a separate business line within JOL. JOL is undertaking significant expansion in Niacinamide and it will now be housed under a separate division termed Nutritional Products. JOLs entry in the PPES business was aided by its strong position in acetyl and acetylbased compounds that are the building blocks for Pyridine. JOL enjoys a cost advantage owing to vertical integration and scale in acetyls. We note that JOL has leadership position in some acetyls, such as acetic and acetic anhydride in India.
PPES business includes Pyridines and its derivatives

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Exhibit 3. Pyridine consumption by product

Others 15% gammaPicoline 3% alphaPicoline 10% BetaPicoline 27% Pyridine 45%

Exhibit 4. Pyridine consumption by end use

Others 17%

2-Vinyl Pyridine 7%

AgriChemicals 40%

Niacinamide/ Niacin 36%

Source: CEH estimates-SRI Consulting

Source: CEH estimates-SRI Consulting

Leadership position in pyridines

JOL has a leadership position in pyridine and its derivatives. The company has strong chemistry experience of more than 25 years and offers a basket of 150 products, including various derivatives of pyridine and picolines. In an effort to expand its product offering, JOL acquired a 100% stake in Specialty Molecules in FY09 for INR200mn. Speciality Molecule has a strong position as the manufacturer of halogenated pyridine derivatives that uses the niche technology of halogenation. In 2007, JOL, with a capacity of 42,000MT (Exhibit 5), was the second largest producer of pyridines. On account of its scale and vertical integration, JOL has significant cost advantages. In fact, some of the small international players closed operations as they could not compete on cost. As a result JOL gained market share and is currently the largest player in pyridines. JOL and Vertellus have a duopoly-like position. JOL expects to increase its market share as it plans to expand its capacity by 20% to some 50,000 MT through de-bottlenecking.
Strong economies of scale

Exhibit 5. Major pyridine producers

(000 metric tonnes, 2007) Vertellus Jubilant Lonza Red Sun Total Americas 37 0 0 0 37 Europe 0 0 20 0 20 China 22 0 5 12 39 Other Asia 0 42 0 0 42 Total 59 42 25 12 138 % of rest of world 33 23 14 7 77

Source: CEH estimates-Sri Consulting

Strong foundation for exclusive synthesis business

The chemistry skill set and technology platform in pyridines forms the foundation for the Exclusive Synthesis business. The Exclusive Synthesis business offers research, development and manufacturing services for intermediates and APIs for New Chemical Entities (NCEs) and in-market products. This includes all stages from development to commercialisation. Here the company participates with the innovator companies in early stages of drug development. During this time, it produces inputs in small quantities for synthesis. Once the molecules are commercialised, it can leverage these relationships for winning manufacturing contracts for commercial quantities. Currently JOL is working on three phase II and eight phase III molecules. We think some of the phase III molecules could obtain regulatory approval over the next two years, leading to a commercial manufacturing contract for JOL.

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Active Pharmaceutical Ingredient (API)

JOL entered the API business with the acquisition of Max Indias facility in 2003. Max had a US FDA-approved facility in Mysore, Karnataka. So far, JOL has commercialised around 40 products and plans to significantly increase the pipeline over the next five years. It intends to develop a product basket of more than 100 products by FY13F. In our view, JOL has attained a global leadership position, particularly in CNS products such as Carbamazepine, Oxcarbazepine, Lamotrigine, Citalopram and Risperidone. Currently, JOL has 17 DMFs that may be commercialised on patent expiry. These APIs represent a brand market of US$40bn. The company expects sartans to emerge as a growth driver for the company. In addition, JOL is developing a pipeline of APIs representing brand product sales of some US$50bn.

Exhibit 6. API Pipeline

DMF Filing 90 80 70 60 50 40 30 20 10 0 FY06 FY07 FY08 FY09 FY10F FY11F FY12F DMF filed Projected DMF filing R&D Pipeline

Targeting US$50bn of brand product sales

Source: Company presentation

Exhibit 7. DMFs filed

Molecule VALSARTAN DONEPEZIL HYDROCHLORIDE ESCITALOPRAM OXALATE ARIPIPRAZOLE IRBESARTAN QUETIAPINE FUMARATE RISEDRONATE SODIUM ZOLEDRONIC ACID PANTOPRAZOLE SODIUM OLANZAPINE FORM-I LOSARTAN POTASSIUM CANDESARTAN CILEXETIL ATORVASTATIN CALCIUM (AMORPHOUS) ESOMEPRAZOLE SODIUM RABEPRAZOLE SODIUM ESCITALOPRAM OXALATE (ESP) PALIPERIDONE (ESUB)
Source: IMS, Nomura estimates

Patent Expiry Sep-12 May-11 Mar-12 Apr-15 Apr-12 Apr-12 Jun-14 Sep-12 Jul-10 Oct-11 Apr-10 Dec-12 Nov-11 May-14 Jun-13 Mar-12 Apr-12

Sales (US$mn) 1,650 1,500 2,700 1,733 500 4,305 1,100 775 1,800 2,800 1,200 255 8,720 6,300 1,231 2,700 357

Nomura

3 February 2010

Jubilant Organosys

Saion Mukherjee

Contract Manufacturing Operations (CMO)

Contract Manufacturing in Pharma can grow at 10-15% over the next five years
The pharmaceutical manufacturing outsourcing market is estimated at US$35-40bn. This represents 25-30% of the overall pharmaceutical manufacturing, in our view. Approximately 70% of the outsourcing market, ie, US$25-28bn is on account of bulk and intermediate manufacturing, and the rest on account of formulations. Outsourcing is more prevalent in the API/intermediate segment than in formulations. We believe almost 50% of the API/intermediate production is outsourced, whereas the proportion is only 15% in the case of formulations. The innovator pharmaceuticals are more inclined to outsource API/intermediate compared with formulations, based on the following: Quality requirements are more stringent in formulations, since this is the final product. It is not easy to rework the product if a quality issue crops up. However, an API/ intermediate can be reprocessed to meet quality requirements. From a supply-chain perspective, it is easier to handle API/intermediate outsourcing than formulation outsourcing. In API/intermediate, the product (API/intermediate) is transferred between limited points from the outsourcing location to a few formulation facilities. In formulation, however, the finished product is transferred from the facility to various segments of the distribution channel. Even within formulations, the plain formulations, namely oral tablets and capsules, are outsourced more frequently compared with steriles/injectables, which demand more stringent quality norms. As per one estimate by Frost and Sullivan, oral formulations and liquids account for 55% and 25% of the formulation outsourcing market. Injectables account for the remaining 20% of the market accounts. We expect outsourcing penetration to increase, both in the case of API/Intermediate and formulations, as Pharma majors focus on drug discovery and sales and marketing. We believe the outsourcing industry can record growth of 10-15% over the next five years, with the potential for outsourcing penetration to double during the period.
Almost 25-30% of pharmaceutical manufacturing is outsourced. Industry size estimated at US$35-40bn

JOL strong presence in the injectable CMO space

JOL has entered into the CMO business primarily through acquisitions. JOL acquired Hollister and Draxis in June 2007 and April 2008, respectively. These acquisitions positioned Jubilant as a strong player in the Injectable CMO space. JOL is among the top-10 players in the world and is the largest Indian injectable contract manufacturer. As detailed above, in formulation outsourcing it is advantageous to be close to the final market, hence these acquisitions overseas make strategic sense. Over time, JOL may vertically integrate into APIs (most likely from Indian assets) and thereby bring in cost advantage. In addition to injectables these acquisitions led to JOLs presence in contract manufacturing of liquid, ointments and creams. Currently, JOL has available capacity of 180mn vials with 60mn at Draxis (Kirkland, Canada) and 120mn at Hollister (Stier, Spokane, US). The capacity at the Hollister site has been expanded from 42mn vials at the time of acquisition to 120mn.

Nomura

10

3 February 2010

Jubilant Organosys

Saion Mukherjee

Exhibit 8. Injectables manufacturers (based on 2008 sales)

Revenues (US$mn) 500 400 300 200 100 0 Nextpharma Catalent Fareva Baxter Famar PATHEON BI (inc.BV) Recipharm Hospira Vetter Jubilant Haupt DSM

Source: Patheon Presentation

The capacity utilisation of the injectable facility is currently estimated at 65% as per the company. Already JOL is servicing 35 customers, including six of the top 10 pharmaceutical companies. JOL intends to expand the customer base through aggressive business development efforts. It signed four new contracts recently that are expected to be the key growth driver from here, on our reading. On the back of the new contracts and business development efforts, we expect the business to deliver a CAGR of 15-20% over the next two years, leading to more optimal utilisation of existing capacity. Besides capacity availability, JOL benefits from a strong regulatory track record a must for gaining outsourcing contracts. In the non-sterile business, JOL provides manufacturing services in Ointments, Gels, Creams and liquids. JOL has 12 key customers, with J&J being the largest. In early 2009, JOL initiated a US$116mn five-year contract for J&J. Overall, we believe the CMO business offers good visibility. As at end-FY09, the CMO business has an orderbook of US$623mn (US$474mn for sterile injectables and US$116mn for non sterile), which is 6.23x revenue for FY09.

Increase in capacity utilisation expected on back of new contract wins

Nomura

11

3 February 2010

Jubilant Organosys

Saion Mukherjee

Acquisitions in the CMO space

Draxis was acquired in April 2008 for a total consideration of US$255mn. At the time of acquisition, Draxis had two lines of business Contract Manufacturing and Radiopharmaceutical. The contract manufacturing business contributed 70-75% of Draxis revenues. Almost three-quarters of contract manufacturing revenue came from sterile injectable products. JOL acquired Hollister in April 2007 for a total payout of US$122.5mn. Hollister primarily focused on contract manufacturing in the injectable space and allergy business, which sold immunotherapy and vaccine products. Contract manufacturing contributed 60% of revenue. At the time of acquisition, JOL had committed to capital expenditure to the tune of US$40mn, increasing its contract manufacturing capacity by 2.5x. Contract manufacturing of both acquisitions was reorganised and clubbed under the new CMO business. The Radiopharmaceutical and the Allergy Business is now organised under Specialty Pharmaceutical.

Reorganisation of Draxis & Hollister acquisitions

Draxis Hollister

Contract Manufacturing

Radio Pharma

Contract Manufacturing

Allergy Business

CMO Sterile Products Non Sterile Products

Source: Company data

Specialty Pharma Radio Pharma Allergenic Extracts

Nomura

12

3 February 2010

Jubilant Organosys

Saion Mukherjee

Drug Discovery and Development Services (DDDS)

Compelling need to outsource and a move towards collaborative approach
The innovator Pharma players are witnessing a decline in R&D productivity and facing stiff hurdles in terms of sustaining earnings growth, since some of the key products in their portfolios face patent expiration. In the US alone, we estimate that drugs worth some US$75bn would face generic competition over the next three years, which accounts for some 30% of the brand market. Lower success in drug development implies revenue loss from patent expiry is not replenished by new product launches. In an effort to control cost and improve productivity the innovator Pharma players are looking at options to outsource drug discovery and development. In addition to this need at innovator Pharma, the contract research industry is benefiting from the emergence of small biotech and specialty companies. These companies have limited infrastructure and capabilities a gap that can be filled by outsourcing organisations. At present, some 35-40% of drug R&D work is outsourced. Based on the industry interaction the outsourcing market is estimated at some US$20-25bn, which is about 25% of the annual R&D spend. Almost 70% of the outsourcing is for clinical trials, per industry estimates, as per Kalorama information.
R&D outsourcing market is estimated at US$20-25bn with less than 2% market share for India

Exhibit 9. US pharmaceutical industry R&D spending (US$bn)

Internal Spend 18 22 27 34 Total Outsourcing 2 7 13 24 Outsourcing Discovery services 0 2 4 7 Outsourcing Clinical services 2 5 9 17 Total Spending 20 29 40 58 Outsourced (%) 10 24 33 41

Year 1997 2001 2005 2009

Source: Kalorama Information, Wuxi PharmaTech

One interesting trend is that, over the years, the contract research industry has evolved from mere tactical outsourcing by innovator Pharmas, with only spill-over work coming through to Contract Research Organisations (CRO), to a partnership-based approach. This transition requires CROs to significantly upgrade the skillset and presents an opportunity to gain significant upside in case a drug is commercialised. In such a collaborative approach, the CRO gets a percentage of sales as royalty.

Indias Contract Research industry is nascent, but set to grow

Our interaction with the industry suggests that the Indian Contract Research industry is worth less than US$500mn, implying less than a 2% market share of the pharmaceutical R&D outsourcing market. India presents advantages with respect to cost, patient population, skillsets and the like. As per the industry estimate by outsourcing R&D to India, the innovator pharmaceutical companies could save almost 60% of costs. The savings can be realised across all stages of drug discovery process from Research Biology to clinical development. However, on our estimates, the largest savings can be achieved in the area of research chemistry and clinical development. The Indian Contract Research companies are gaining traction and have established credibility, as evidenced by various deals struck by Indian companies with large pharmaceutical companies. Indian companies involvement is not only limited to feebased model, but has evolved to the collaborative model for drug discovery.
For any number of reasons, it is far cheaper to develop drugs in India

Nomura

13

3 February 2010

Jubilant Organosys

Saion Mukherjee

JOL: spreading across and moving up the DDDS value chain

JOL is providing end-to-end services spanning early stage discover (lead generation, target identification), chemical synthesis, clinical trials and contract manufacturing to innovator companies. It provides these services through its three subsidiaries: Biosys, Chemsys and Clinsys. There are two business models that JOL is working on: 1) a standalone service model, where clients chose the service they would like to use. This is typically a Full Time Equivalent (FTE) or a fee-based model. Herein the costs are typically covered and the company makes a small margin (say about 10%); and 2) collaborative and partnership-based model wherein JOL partners with innovator pharmaceutical companies for development of basket of products. Herein, JOL is paid a milestone payment through the tenure of the development. As milestones are paid at fairly regular intervals, the risk is lower. Further, on successful commercialisation of a product, JOL will be paid royalty on sales. Incrementally, with the intent to move up the value chain JOLs focus is more on the collaborate and partnership model. JOL has had initial success as it has entered into collaborative deals with Eli Lilly, Forest Labs, Amgen, Astra Zeneca, and Endo Pharmaceuticals.

Exhibit 10. Collaborations with global Pharma majors

Company Eli Lilly Forest Labs Astra Zeneca Endo Pharmaceuticals Signed Details Oct-08 Clinical Research support in India Joint venture for drug development Dec-07 Integrated collaboration in Metabolic Disorders Discovery efforts at Jubilant, Development efforts at Forest May-09 Focus on neuroscience area Jubilant eligible for a initial 5-year research funding Jun-09 Focus on Oncology. Research Funding, Development milestones and Sales Royalties
Source: Company data, Nomura research

Overall, the drug discovery services division has manpower of 1,000-plus, of which 65% are scientists. We believe that JOLs presence across the value chain will increase traction with innovator companies, enabling it to participate in contract manufacturing at a later date. Biosys: Biosys provides services in bioinformatics, structural biology, high throughput screening, IN Vivo, Insilco modelling. Chemsys (Custom chemical synthesis): Chemsys provides services in Medicinal Chemistry. As part of the activities, it collaborates in all areas of medicinal chemistry activities that include design, synthesis, SAR support and scale-up, accelerating Hit to Lead optimisation efforts for the innovator pharmaceutical companies. Clinsys (Clinical trial services). Clinsys provides trial services to both innovator and generics companies. JOL acquired Target, a clinical research organisation, in September 2006 for US$34.5mn. This entity carries out clinical trials from Phase II to Phase IV in the US. In addition, Clinsys has set up a 60-bed clinical-trial facility in Noida. This will be used to conduct bio-equivalence and bioavailability studies to generics companies and clinical trials after regulatory approvals.

1,000-plus strong group, 65% of which are scientists

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Specialty Pharmaceuticals
The Specialty Pharmaceuticals division was formed as part of the reorganisation carried out following the Hollister and Draxis acquisitions. It consists of two divisions viz RadioPharma (from Draxis) and Allergenic extracts (from Hollister).

Radiopharmaceuticals
JOL manufactures and markets radiopharmaceuticals that are used for various diagnostic and therapeutic uses. The usage is in scanning and imaging of various body parts. In terms of therapeutic area the usage is in cardiovascular, oncology and endocrinology. Introduction of newer diagnostic and therapeutic agents is seen to boost the radiopharma market. The US radiopharma opportunity is pegged to reach US$2.6bn by 2012F, as per JOL. JOL produces and markets radiopharmaceutical products for both diagnostic and therapeutic use. Currently, I-131 is the major revenue driver, with the product commanding a greater than 70% market share in the US. The company has lined up new product launches over the next couple of years that should provide a revenue boost, we believe. Sestamibi was approved by the US FDA in May 2009. But owing to issues surrounding the isotope supply on account of the nuclear reactor shutdown, the product has not ramped up as per the companys expectations. The nuclear reactor is expected to be back in operation in March 2010, according to the current schedule. Hence, we expect Sestamibi sales will normalise in FY11F. JOL has an exclusive distribution agreement with GE Healthcare to distribute and sell its products in the US. It has inked a distribution agreement with Guerbet for Europe. Going forward, the company plans to introduce its products in the Asian markets, Australia and rest of the world.
Growth in Radiopharmaceutical business should revive once the supply issue of radio-isotope is addressed

Exhibit 11. Product pipeline

Product Generic Cardiolite Sestamibi Kit MOLY-FILL Technetium generator Ruby Fill
Source: Company data

Indication Myocardial perfusion imaging Nuclear medical applications Cardiac imaging

Market size US$631mn (US) US$69mn (Europe) US$167mn Current US$25 mn Potential US$100 mn

Allerginic extracts
Allergenic extracts business contributes about 3% of total sales for the company. The majority of the therapeutic and diagnostic extracts are derived from pollens, animals and stinging insect venoms. The company is focused on higher-margin products such as venom allergen. It is also working on gaining cost efficiencies through production optimisation.

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Generics
Entered the business through acquisitions
JOL entered the formulations markets in the EU and US with the acquisition of PSI and Trinity. These acquisitions provided JOL front-ends in regulated markets. In FY05, JOL acquired an 80% stake in PSI and PSI Supply in Belgium for US$17mn. PSI provides regulatory and other services such as development and licensing of dossiers, and tieups for supply of APIs and formulations in European markets. In the US, JOL entered the formulations business with the acquisition of Trinity/Trigen (renamed Cadista) in July 2005 for US$20.25mn (up-front payment of US$8.25mn to shareholders, US$4mn for investments in the company, and another investment of US$8.5mn over the next two years).

Cost advantage through vertical integration and in house capabilities

For the generic business, the company has cost advantage on account of in-house sourcing of API and intermediates. Further, it carries out bioequivalence studies that are required for ANDA submission in house at Clinsys.

Facility in the US helps address the government tender market

Currently, JOL has two facilities in generics: a facility at Salisbury, UK; the US; and a greenfield facility at Roorkee, India. The Salisbury facility was acquired as part of the Trinity acquisition. The facility has a capacity of 1.5bn tablets and capsules per year. This will enable JOL to tap US government business, which by law is restricted to companies manufacturing in that country. JOL has a contract from the US government to supply Terazosin HCl. The tender business currently accounts for 10% of the Pharma industrys volumes in the US. JOL is looking at more such opportunities in the tender market. The Roorkee facility, with a capacity of 2.5bn tablets and capsules per year, is approved by UKMHRA. The company has started filing ANDAs to the US market from this facility. This should result in inspection and approval of the facility by the US FDA. The production facility is currently underutilised. With the increase in generic approvals, capacity utilisation is expected to increase over time, on our reading. In addition, the facility may be used to service requirements of innovator Pharma as part of Contract Research Business, if required.
Need to be in the US to do business with US government

Expanding pipeline to drive growth

Currently, JOLs generic business is subscale. At present, JOL has 15 dossiers approved in the EU and 10 ANDAs approved in the US. Currently, there are 17 products under development and the company intends to file 10 new products every year. The product selection is likely to be based on API and intermediate capabilities of the company. In the US, JOL is among the top-three players in five products in the US market. As depicted in the exhibit below, we find a consistent rise in Cadista prescriptions. The growth rate has slowed since early 2009, but is still 17% pa.

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Exhibit 12. Prescription trend at Cadista

(TRx'000) 2,000 1,600 1,200 800 400 0 Jan-07 Jan-08 Jan-09 Oct-07 Oct-08 Oct-09 Jul-07 Jul-08 Apr-07 Apr-08 Apr-09 Jul-09

Source: IMS

Life Science Chemicals

Life Science Chemicals is the oldest business for JOL. The company produces intermediates, also known as acetyls (which are used in production of pharmaceutical products), crop protection chemicals and textiles. JOL manufactures the products through the organic route. JOL is the largest producer of acetic anhydride and secondlargest producer of acetic acid in India. JOLs production capacity of 56KT in acetic acid compares with a total production capacity of 337KT. Jubilant is the largest producer of acetic anhydride in India. Jubilant accounts for more than half of the total capacity of 58,000MT in the country.
Indias largest producer of acetic anhydride

Exhibit 13. Domestic acetic anhydride

Ashok Organic, 12%

Exhibit 14. Domestic acetic acid

Somaiya Organics, 5% Jubilant, 15%

Dhampur Sugar, 8%

Color Chem, 2%

Jubilant, 57%

GNFC, 27% Others, 44%

Industrial Organics, 21%

Industrial Organics, 8%
Source: CEH estimates-SRI Consulting

Source: CEH estimates-SRI Consulting

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Nutritional Products Niacin/Niacinamide (Vitamin B3)

This business division has been recently carved out and will focus on human and animal nutritional products. The key products in this division are Niacin/Niacinamide (Vitamin B3) and Choline chloride. Vitamin B3 (niacin) is a generic term that includes both niacin (nicotinic acid) and niacinamide (nicotinamide). These products are found naturally in living organisms and are key for metabolism and cell respiration. Niacin is produced synthetically from betapicoline, or by oxidation of 2-methyl-5-ethyl-pyridine at a high temperature and pressures.

Exhibit 15. Pyridine to vitamin chain

Acetyldehyde Catalyst Formaldehyde Beta Picoline Beta Picoline derivatives Pyridine Pyridine derivatives

3- Cyanopyridine

Niacinamide (B - complex vitamin)

Source: Company data, Nomura

As detailed in the previous section, JOL is one of the largest producers of Betapicoline, which is the key raw material used for production of Niacin/Niacinamide. Hence, JOLs presence in Niacin/Niacinamide appears to be a step towards integration. Currently, JOL is outsourcing manufacturing of Niacin/Niacinamide to the extent of 2,3002,400MT/annum. This represents a market share of 8-9% for JOL, as the Vitamin B3 market is estimated at 26,600MT/annum. (source:CEH, Sri Consulting) In an effort to increase its market share, JOL is putting up at 10,000MT Vitamin B3 capacity. This should significantly increase JOLs market share, in our opinion. As per the company, it has received positive feedback from its customers and can utilise 4550% of the capacity in the first year of operation. The plant is expected to be commissioned by December 2010. JOL has a cost advantage owing to scale, vertical integration and tax incentives (as this plant is set up in an SEZ in Gujarat, India). We understand that even the largest player, Lonza, which has a 45-50% market share, is not vertically integrated. In fact, JOL is one of the suppliers of beta picoline, the key raw material used in production of Niacin/Niacinamide to Lonza. Choline chloride accounts for less than 2% of JOLs business. Chlorine chloride is used as a dietary supplement in animal feed, mainly for chickens, turkeys and swine.

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Healthcare
Healthcare is a nascent business and contributes a very small proportion of revenue. It is focused on providing specialised healthcare services in Eastern India. Besides providing specialised healthcare services, the venture should enable JOL to tap a captive population for clinical trials. The infrastructure will be set up with a typical hub and spoke model. JOL plans to set up hubs at Howrah, West Bengal, and 600-bed spoke hospitals in district towns. Two 165-bed hospitals have already been set up. JOL plans to invest INR1,800mn over the next three years to build capacity of close to 1,000 beds. The entire project is likely to be completed by 2011F, we believe.

Agri & Performance Polymers

This is the low-margin commodity business for JOL. On account of dependence on commodities, the business faces fluctuations in margins. Going forward, management has indicated that the APP business will be separated from the PLSPS business and will be listed on stock exchanges. We discuss some of the key business under APP in this section.

Food polymer business

The food polymer business mainly consists of manufacturing solid Poly Vinyl Acetate (PVA), which is used in manufacturing chewing gum. JOL is Indias largest manufacturer of PVA, with a 95% market share. JOL is the third-largest global PVA manufacturer. JOLs product is approved by many international chewing gum manufacturers and more than 75% of the production is exported. JOL plans capacity expansion of 120% by June 2010. As per management, there are enough contracts to fully use the expanded capacity and revenues are estimated to double in three years

Fertilisers
Under this segment JOL manufactures fertilisers, insecticide and plant growth regulator. JOL is the leader in single superphosphate market. JOL has increased the capacity of the Superphosphate to 410KT and almost 90% of the capacity is likely to be used by FY11F. The current capacity utilisation is only 50%. SSP is one of the simplest fertilisers available, with an installed capacity of approx 1,000MT in the country.

Industrial Products and Performance Polymers

Under this section, JOL manufactures and markets industrial products such as Vinyl Pyridine (VP)/Styrene Butadiene Rubber (SBR) Latex and a large range of binders that are used in a number of industries such as tyres, conveyor belt fabric and so on. JOL is the market leader in India. The company is putting in capacity expansion of 50%, which it expects to be utilised in FY11F. The company intends to increase its market share to 70%. Under industrial products, JOL also produces liquid Co2 and Ethyl Oxide Mixtures (ETO), which find usage in the soft drink and beer industries. ETO is primarily used for sterilising medical equipment. Under the performance polymer business, JOL manufactures products for applications in furniture, textile, and footwear. The products include adhesives, laminate, sealants and packaging.

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Financial analysis

Strong earnings momentum

We expect a revenue growth CAGR of 14% over FY09-12F
We forecast a revenue CAGR of 14% over FY09-12F. Over FY06-09, JOL recorded a revenue CAGR of 32%. But this growth was aided by the acquisitions of Draxis and Hollister during the period. Excluding these, the revenue CAGR stands at 23% for the period. We believe JOL has, over the years, developed customer traction and scaled up the business that will drive growth. As we see it, the key drivers of growth are: CMO: Capacity has been significantly augmented to 180mn vials. JOL is pursuing aggressive business development, and signed three new contracts in the recent past that should, we believe, drive growth from 4Q FY10 onward. Current capacity utilisation is only 65%; we reckon capacity will be optimally utilised by FY12. Prop products and exclusive synthesis: Expanding capacity by de-bottlenecking and increasing traction in exclusive synthesis. Currently, out of eight products in Phase III, a few can enter commercialisation. Cost advantages and stable management should help garner a larger market share, we believe. Nutritional Products: Putting up 1,0000MT vitamin B3 capacity, which is approximately 37% of the current world capacity. Cost advantage through vertical integration in Beta picoline should help it to gain market share. Speciality products: Availability of nuclear isotope and launch of new products to drive growth. We build in a 31% CAGR by FY12F for this segment as Sestamibi (1H FY11F), MollyFill (end-2010D) and RubyFill (end-FY11F) are introduced to the market. Generic and API: Product launches to drive growth. Patent expiries should present opportunities for growth. Drug Discovery and Development services: Gaining traction with big Pharma, as evidenced in deals signed in the recent past. JOL is moving up the value chain by entering into collaboration.
The company has built revenue traction over the years

Exhibit 16. Revenue projections by segment

Growth FY09-12 contribution, FY12F CAGR (%) FY09-12 (%) 29,024 12,147 8,359 4,588 3,930 2,375 3,646 8,028 3,713 104 5,324 52,213 15 10 20 22 18 28 24 11 31 23 (1) 14 59 17 20 12 9 7 10 12 12 0 (1) 100

(INRmn) CRAMS Prop Products CMO API DDDS Generics Speciality Pharma Life Science Chemicals Nutritional Healthcare APP Total sales

FY08 13,128 7,072 2,071 1,880 1,543 680 742 5,774 1,320 16 3,440 24,539

FY09 19,014 9,167 4,894 2,535 2,418 1,139 1,921 5,930 1,650 56 5,460 35,170

FY10F 21,370 9,750 6,150 2,850 2,620 1,520 2,290 6,400 2,001 79 4,400 38,059

FY11F 25,023 10,666 7,399 3,684 3,275 1,900 2,833 7,168 2,475 94 4,840 44,334

Source: Company data, Nomura estimates

Stable EBITDA margins from here

Over the past few years, JOLs business mix has changed as it has transformed from a manufacturer of industrial and utility chemicals to an integrated pharmaceutical player. The contribution to the total revenue from the Agriculture and Performance Polymer

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(APP) segment, which is subject to most the most volatility in prices, has fallen from 21% in FY06 to 12% in FY10F. We estimate that the share of APP business will fall to 10% by FY12F. This has helped stabilise margins, in our view. We expect incremental improvement in margins. This is on account of a lower proportion of low-margin APP business and a rise in margins in certain segments of Pharma and Life Sciences business, owing to higher volumes and increased capacity utilisation. One of the lowest-margin business within PLSPS is DDDS, and we expect margin improvement in this segment from here. In DDDS, JOL has now moved away from an FTE model to a partnership model. We believe this transition should help boost margins.

Exhibit 17. EBITDA margins

(%) 60 50 40 30 20 10 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F 10 5 0 Core EBITDA margin (LHS) EBITDA growth (RHS) (%) 25 20 15

Source: Company data, Nomura estimates

Expect strong earnings and cashflow over FY09-12F

We expect earnings to post a CAGR of 24% over FY09-12F. During this period, we expect a 246bps improvement in net profit margin from 8% to 10.5%. We estimate strong cashflows over FY10-12F, which will be required to meet capex requirement and debt repayment liabilities.

Capex lined up for capacity expansion

JOL has lined up capex for expanding the capacity of its various manufacturing facilities. This includes an increase in capacity for Vitamin B3, Pyridine and API. These are due to come on line over the next two years. Capex guidance for the company stands at INR3bn annually for FY11F and FY12F.

FCCB liability to be met through internal accruals

The company has outstanding FCCBs due in May 2010 and May 2011. We dont build in conversion of FCCBs at this stage. The current price is significantly lower than the price required for conversion (Exhibit 18). We estimate an interest outflow of INR821mn (FY11F) and INR1,507mn (FY12F).

Exhibit 18. FCCBs

Pending Conversion (US$mn) price (INR) 49.7 273.1 142.1 413.5 Total repayment (US$mn) 68.7 202.4 Conversion price with YTM (INR) 401.0 529.5

Amount US$75mn US$200mn

Due May-10 May-11

Source: Company data, Nomura estimates

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Leverage still high, but likely to come down

For FY09, net debt to equity at JOL stood at 2.8x. However, the company has indicated that it repaid some debt in the first nine months of the current fiscal, resulting in the net debt to equity falling to 1.7x. Based on our cashflow projection, we estimate net debt to equity will come down to 1.13x by FY12F.

Exhibit 19. Leverage

(x) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY05 FY06 FY07 FY08 FY09 FY10F FY11F FY12F

Source: Company data, Nomura estimates

Return on equity to remain at 21-25%

Return on equity for the business has been volatile, following the volatility in earnings. For FY10F, we see ROE at 25%, closer to the eight-year average of 26%. However, for FY11F and FY12F, we anticipate ROE will stay low at 22% and 21%, respectively, on higher interest outflow. Higher interest is on account of FCCB repayments. Excluding the interest payments on FCCB, estimated ROE stands at 24% for both FY11F and FY12F, despite the fall in leverage.

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Valuation

Attractive valuations
Our 12-month (March 2011) price target for JOL is INR448, based on 9x one-year forward EV/EBITDA multiple, with FY12F core EBITDA estimated at INR10.8bn. Before the market correction in late 2008, the shares historically traded in a band of 9-11x on one year forward EV/EBITDA. After the correction last year, the stock has re-rated to 9.5x one year-forward EV/EBITDA. Given the volatility in commodity prices, slowdown in outsourcing following the economic crisis and slower-than-estimated ramp-up in radiopharmaceuticals, we believe that the valuation range may be lower, at 8-10x, in the near term. Our view is that the stock could re-rate back to 9-11x, once the concerns on the above subsides. Our target multiple of 9x is based on mid-range of the 8-10x valuation range and is in line with the trading multiple of the peer group. Our price target implies upside of 38.8%. We initiate coverage with a BUY rating.
The shares are roughly in the middle of their historical valuation range, but prospects look solid

Exhibit 20. One year forward EV/EBITDA

12 10 8 6 4 2 0 Feb-07 Feb-08 Dec-06 Dec-07 Dec-08 Feb-09 Dec-09 Oct-06 Oct-07 Oct-08 Jun-07 Jun-08 Aug-07 Aug-08 Jun-09 Aug-09 Oct-09 Apr-07 Apr-08 Apr-09

Source: Company data, Nomura

Share performance
Over the past year, the stock has outperformed the Sensex and the healthcare index by close to 90%. This is primarily on account of contracts signed for the CMO businesses, giving earnings visibility and management intent to separate its low-margin APP business.

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Peer comparison
JOLs businesses span multiple segments. Hence, for peer comparison, we have identified Indian and international companies that represent JOLs various business segments. The valuation details are presented in Exhibit 21. On an average, the comparable universe (as identified by Nomura) trades at an EV/EBITDA of 9x one-year forward estimates.

Exhibit 21. Peer comparison

Company Lonza Patheon DSM Parexel PPD Baxter Covance International peers Dishman Pharma Divis Piramal Domestic Peers Overall Avg
Source: Bloomberg consensus estimates

Rating NR NR Neutral NR NR NR NR NR NR BUY

1-yr fwd 1-yr fwd Ticker EV/EBITDA (x) P/E (x) LONN VX 7.6 13.1 Pharma chemicals, Custom manufacture PTI CN DSM NA PRXL US PPDI US BAX US CVD US DISH IS DIVI IN PIHC IN 5.6 7.8 8.2 9.0 9.0 9.9 8.2 8.0 15.0 9.8 10.9 9.0 15.9 Contract manufacturing 17.0 Specialty life sciences and Materials sciences 19.5 CRO 22.6 CRO 13.5 Diversified healthcare 21.1 CRO 17.5 10.6 Custom synthesis, manufacturing 18.1 Custom synthesis, manufacturing 13.5 Custom synthesis, manufacturing, domestic formulation 14.1 16.5

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Financial statements
Income statement (Rsmn) Year-end 31 Mar Revenue Cost of goods sold Gross profit S G&A E mployee share expense Operating profit E BITDA Depreciation A mortisation E BIT Net interest e xpense A ssociates & JCEs Other income E arnings before tax Income tax Net profit after tax Minority interests Other items P referred dividends Normalised NPAT E xtraordina ry items Reported NPAT Divide nds Transfer to reserves V aluation and ratio analysis FD normalise d P/E (x) FD normalise d P/E at price target (x) Reported P/E (x) Divide nd yield (%) P rice/cashflow (x) P rice/book (x) E V/EBITDA (x) E V/EBIT (x) Gross margin (%) E BITDA margin (%) E BIT margin (%) Net margin (% ) E ffective tax rate (%) Divide nd payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue E BITDA E BIT Normalised EPS Normalised FDEPS P er share Reported EPS (Rs) Norm EPS (Rs) Fully diluted norm EPS (Rs) B ook value per share (Rs) DPS (Rs)
Source: Nomura estimates

FY08 24,889 (9,863) 15,026 (10,128) 4,898 5,937 (1,039) 4,898 (337)

FY09 35,180 (13,502) 21,678 (17,641) 4,036 5,669 (1,632) 4,036 (1,070)

FY10F 38,059 (14,821) 23,238 (16,658) 6,579 7,820 (1,241) 6,579 (1,504)

FY11F 44,334 (17,333) 27,001 (19,108) 7,893 9,205 (1,312) 7,893 (2,272)

FY12F 52,213 (20,415) 31,798 (21,955) 9,843 11,234 (1,390) 9,843 (2,983)

SGA was impacted by forex loss in FY09. The company accounts for forex impact within SG&A

4,561 (573) 3,988 16

2,966 (267) 2,699 133

5,075 (992) 4,083 (43)

5,621 (1,124) 4,496 -

6,860 (1,372) 5,488 -

4,005 4,005 (257) 3,748

2,832 2,832 (261) 2,571

4,040 4,040 (274) 3,765

4,496 4,496 (288) 4,208

5,488 5,488 (302) 5,186

14.5 19.3 11.7 0.5 10.3 3.7 10.8 13.0 60.4 23.9 19.7 16.1 12.6 6.4 22.3 5.3 37.0 16.3

19.7 26.1 17.0 0.5 9.4 3.8 14.6 20.6 61.6 16.1 11.5 8.0 9.0 9.2 25.4 5.5 22.4 8.3

13.8 18.3 11.9 0.6 10.5 2.9 10.3 12.3 61.1 20.5 17.3 10.6 19.6 6.8 6.6 2.0 27.7 10.6

12.4 16.5 10.7 0.6 8.7 2.3 8.6 10.1 60.9 20.8 17.8 10.1 20.0 6.4 6.8 2.3 24.2 12.1

10.1 13.5 8.8 0.6 5.7 1.9 6.9 7.8 60.9 21.5 18.9 10.5 20.0 5.5 5.7 2.2 23.6 14.2

37.5 57.5 55.6 74.7 72.3

41.3 (4.5) (17.6) (31.0) (26.1)

8.2 38.0 63.0 42.6 42.6

16.5 17.7 20.0 11.3 11.3

17.8 22.0 24.7 22.1 22.1

27.8 27.8 22.4 87.3 1.8

19.2 19.2 16.6 85.9 1.8

27.4 27.4 23.6 111.4 1.9

30.5 30.5 26.3 140.0 2.0

37.2 37.2 32.1 175.1 2.1

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Cashflow (Rsmn) Year-end 31 Mar E BITDA Change in working capital Other operating ca shflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets A ddition in other LT liabilities A djustments Cashflow after investing acts Cash dividends E quity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow B eginning cash E nding cash E nding net debt
Source: Nomura estimates

FY08 5,937 (1,824) 456 4,570 (5,552) (982) (418) 24 (58) (6,790) (8,223) (209) 14 6,179 (1,272) 4,712 (3,511) 8,749 5,238 15,847

FY09 5,669 1,569 (2,140) 5,098 (8,922) (3,824) (2,257) 13 (152) (15,071) (21,290) (258) 9 15,202 4,915 19,868 (1,422) 5,238 3,816 34,964

FY10F 7,820 (226) (3,027) 4,567 (2,500) 2,067 2,067 4,134 (274) (2,291) (2,565) 1,570 3,817 5,386 32,684

FY11F 9,205 (1,242) (2,438) 5,526 (3,000) 2,526 2,526 5,051 (288) (5,824) (6,112) (1,061) 5,386 4,325 31,405

FY12F 11,234 (1,353) (1,391) 8,490 (3,000) 5,490 5,490 10,980 (302) 1,000 (15,145) (14,447) (3,467) 4,325 858 29,182

Balance sheet (Rsmn) As at 31 Mar Cash & equivalents Marke table securities A ccounts receivable Inve ntories Other current assets Total current assets LT investments Fixed assets Goo dwill Other intangible assets Other LT assets Total assets S hort-term debt A ccounts payable Other current liabi lities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest P referred stock Common stock Retained earnings P roposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilitie s Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Nomura estimates

FY08 5,238 456 4,258 4,350 3,553 17,854 23,971

FY09 3,817 2,714 5,044 5,956 4,855 22,385 42,481

FY10F 5,386 2,714 5,539 6,300 4,855 24,794 43,740

FY11F 4,325 2,714 6,590 7,495 4,855 25,978 45,428

FY12F 858 2,714 7,845 8,921 4,855 25,193 47,037

16 41,842 3,066 3,613 6,679 21,085 1,302 29,066 214 4,118 6,698 1,746 12,562 41,842

3 64,870 5,361 6,582 11,943 38,781 1,151 51,875 320 4,005 7,768 902 12,675 64,870

3 68,537 5,974 6,582 12,556 38,070 1,151 51,777 320 4,005 11,534 902 16,441 68,537

3 71,409 6,978 6,582 13,560 35,730 1,151 50,441 320 4,005 15,742 902 20,649 71,409

3 72,233 8,306 6,582 14,888 30,040 1,151 46,079 320 4,005 20,928 902 25,835 72,233

Long-term debt falls on account of repayment of FCCB loans

2.67 14.5

1.87 3.8

1.97 4.4

1.92 3.5

1.69 3.3

2.67 126.1

6.17 275.8

4.18 198.8

3.41 152.1

2.60 113.0

53.0 146.3 104.1 95.1

48.3 139.3 113.9 73.6

50.8 150.9 139.6 62.1

49.9 145.2 136.4 58.8

50.6 147.2 137.0 60.7

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ANALYST CERTIFICATIONS
Each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is responsible hereby certifies that all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers discussed herein. In addition, each of the research analysts referenced on the cover page or in connection with the section of this research report for which he or she is responsible hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or by any other Nomura Group company or affiliates thereof.

ISSUER SPECIFIC REGULATORY DISCLOSURES

Issuer JUBILANT ORGANOSY Ticker JOL IN Price (as at last close) 322.35 INR Closing Price Date 02 Feb 2010 Rating No Rating Disclosures

Previous Ratings
Issuer JUBILANT ORGANOSYS LTD Previous Rating No Rating Date of change 08 Feb 2006

Online availability of research and additional conflict-of-interest disclosures:

Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG. Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email researchchannelsupport@uk.nomura.com for technical assistance. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.

Distribution of Ratings:
Nomura Global Equity Research has 1,818 companies under coverage. 44% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 31% of companies with this rating are investment banking clients of the Nomura Group*. 39% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 44% of companies with this rating are investment banking clients of the Nomura Group*. 15% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 11% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2009. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomuras equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009:
Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analysts 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A "Buy" recommendation indicates that potential upside is 15% or more. A "Neutral" recommendation indicates that potential upside is less than 15% or downside is less than 5%. A "Reduce" recommendation indicates that potential downside is 5% or more. A rating of "RS" or "Rating Suspended" indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Stocks labelled as "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008:
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. Stocks: A rating of "1", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of "2", or "Neutral", indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of "3", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of "RS-Rating Suspended", indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research); Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008):
Stocks: A rating of "1", or "Strong buy", indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of "2", or "Buy", indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of "3", or "Neutral", indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of "4", or "Reduce", indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of "5", or "Sell", indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled "Not rated" or shown as "No rating" are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. Sectors: A "Bullish" stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A "Neutral" stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A "Bearish" stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 October 2008:
Stocks: Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A "Strong buy" recommendation indicates that upside is more than 20%. A "Buy" recommendation indicates that upside is between 10% and 20%. A "Neutral" recommendation indicates that upside or downside is less than 10%. A "Reduce" recommendation indicates that downside is between 10% and 20%. A "Sell" recommendation indicates that downside is more than 20%. Sectors: A "Bullish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A "Neutral" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A "Bearish" rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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Price targets
Price targets, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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