Is Jubilant Ingrevia's 3x revenue goal just a pipe dream?

Jubilant Ingrevia might be small, but that's not stopping the small-cap chemicals company from dreaming big. The company has set an audacious target: triple its revenue and quadruple EBITDA within five years, i.e., by FY29. That means sales of around Rs 12,000-13,000 crore from around Rs 4,000 crore and EBITDA of Rs 2,400 crore from Rs 456 crore. Achieving this massive goal will also require doubling its EBITDA margin from 11 per cent in FY24 to over 20 per cent. It's only natural to examine just how achievable the ambitious plan is. Let's begin.

What's the game plan?

Betting on higher-margin specialty chemicals: The primary strategy to grab higher sales is to ride the demand for specialty chemicals, where Jubilant is pivoting to. Currently, it earns nearly one-fourth of revenue from this category. The global specialty chemicals market, valued at over $641 billion in 2023, is expected to grow 5.2 per cent annually until 2030. The Indian specialty sector is estimated to grow at a faster clip of 9.3 per cent over this stretch. The 'China plus one' shift is further expected to help Jubilant ride these growth tailwinds.

Besides specialty chemicals, the company operates in nutrition and health, and chemical intermediates. Of these, chemical intermediates have historically been the largest revenue contributor but offer the lowest margins. In FY19, this segment contributed 60 per cent of total revenue. By FY24, that figure had reduced to 45 per cent. The company is consciously shifting its focus toward the higher-margin specialty and nutrition businesses that are targeted to contribute 75 per cent of overall revenue and 90 per cent of EBITDA by FY30.

Capacity expansion: Jubilant has undertaken significant capital expenditure to support this transition. Over the past two to three years, it has invested Rs 1,300 crore and a further Rs 700 crore is planned for FY25. About 77 per cent of this Rs 2,000 crore investment is directed towards specialty and nutrition segments.

Taking the CDMO route: For specialty chemicals, Jubilant has signed a five-year agreement with a multinational agrochemical innovator to manufacture a patented intermediate. It has also initiated capex for two additional CDMO orders in the agrochemical space. CDMO businesses generally offer long-term contracts and higher margins, making them a key part of Jubilant's efforts to improve profitability.

Expanding international footprint: The company is also intensifying its export efforts, targeting a rise in international revenue share from the current 41 per cent to nearly 70 per cent over the next few years.

Is the goal achievable?

The need for ruthless efficiency: The company has said that most of the planned capex will be completed by FY25. This means that with the expected Rs 700 crore capex for the year, the total asset base will be around Rs 5,500 crore.

This means that to achieve revenue of Rs 12,000 crore on an asset base of Rs 5,500 crore, the company has to clock an asset turnover ratio of over 2 times - an aggressive aim considering its own track record and the industry standard. Jubilant's median asset-turnover ratio in the last three financial years has only been 1.2 times.

Peers like Laxmi Organics, a competitor in diketene-based specialty chemicals, operate at around 1.5 times, while global specialty players like Lonza Group and Merck KGaA report a range of 0.4-0.5 times. Evonik Industries stays below 1 times in nutrition products.

Given these benchmarks that are similar to its past record, a ratio of 2 times, to meet the revenue goal, will require Jubilant to exhibit ruthlessly efficient execution and capacity utilisation - something that's easier said than done.

Sectoral risks: Take into account the execution risks, particularly from demand volatility in its key industries like agrochemicals and pharmaceuticals. While the agrochemical segment is gradually recovering from an inventory glut and Chinese oversupply seen in FY24, any renewed weakness could affect volumes and pricing.

Your takeaway

Jubilant Ingrevia's strategic roadmap that bets on sectoral tailwinds of high-margin segments and global expansion is impressive on paper. However, execution is a tall ask, considering the lofty targets of 25 to 30 per cent annual revenue growth. The plan assumes an efficient asset-to-revenue conversion; something that the company hasn't demonstrated in the past.

In addition, at a cyclically-adjusted P/E ratio of 43 times, the valuation already reflects much of the optimism. Execution risks and commodity cyclicality are important factors that need to be priced in the current valuation.

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