Tuesday, March 27, 2012

>J. B. Chemicals & Pharmaceuticals: Defensive Bet

Company Overview
JB chemicals is one of the oldest pharmaceutical companies in India founded by Mr. J.B.Mody. It was earlier known as Unique pharmaceuticals and has 11 manufacturing facilities spread across four locations Panoli, Ankleshwar, Daman and Belapur. Over the years, it has devloped some very formidable brands like
Doktor Mom (given Superbrand status in Russia and CIS countries), Metrogyl, Rantac and Nicardia. They have recently sold their Russian and CIS countries OTC business to J&J for approximately 1200 Crores. They have received proceeds from the sale and distributed around 320 Crores as special dividend to
shareholders. This indeed is commendable and speaks a volume about the management's integrity and its focus towards shareholders.

Investment Rationale
1) Size of the company: JB Chemicals had turnover of 800 crores in year 2010-11. Company has history of more than 50 years. Thus it qualifies on this account as it has a long history of professional management combined with increasing revenue.

2) Sufficiently Strong Financial conditions: Based on FY12E balance sheet JB has current ratio 4.7 (including 561 crores in long term/short term investment) and long term debt is only 25% of net working capital.

3) Dividend Record: JB has uninterrupted dividend payment history for more than 10 years. Moreover company was prompt to declare special dividend on sale of Russian subsidiary, a windfall profit, rewarding shareholders handsomely.

4) Earnings Growth: JB has achieved earnings growth of 11.5% CAGR. Though it is not spectacular, it is decent enough.

5) Price to Earning Ratio: In case of JB chemicals, considering 2010-11 EPS of 14, and reducing it by 30-35% (considering sale of Russian business and hence reduced earnings), at current market price, P/E will be around 7-7.5.

6) Price to Book value: Considering cash from Russian operations, JB is trading much below its book value.

7) Market Cap Less than Net Working Capital: In case of JB, (NWC – Long Term Debt) is 554 Crores while its market cap is also 554 Crores. In other words, Investor is getting Cash/cash equivalents/inventory/investments of Rs 65/share. In addition to this, he is getting fixed assets of the company and operating business for FREE.