Blue Jet Healthcare IPO closes on October 27: Should you subscribe?

Blue Jet Healthcare manufactures advanced and basic intermediates in contrast media (formulations that enhance images for scanners), high-intensity sweeteners (HIS) and growing CDMO operations. Contrast media and HIS which accounted for 71/24 per cent of FY23 revenues can ride on demographic changes globally and incremental demand from emerging markets for growth. The company is also adding 50 per cent more capacity in next two years.

But with the IPO at 37.5 times FY23 earnings (at the upper band) investors can wait and watch for now as valuation appears to be on the expensive side after considering its growth prospects and also customer concentration risks. Although customer relationships are strong, it needs to be noted that the company in the last three years derived 75 per cent of revenue from the top five customers. Investors can consider the stock sometime later in future post listing, at better entry points.

Business and drivers

Contrast media formulations once inside the body are absorbed by the target tissues and enhance images taken by medical instruments: X-Rays, CT Scans or MRI. Blue Jet’s basic and advanced intermediates are supplied to the front-end formulation makers who are forward integrated with those instruments or direct hospital sales. Because of the specialised nature, 70 per cent of contrast media sales are through the four front-end manufacturers and Blue Jet has a long-standing vendor relationship with them.

The product specifications also necessitate a close working relationship which resembles a CDMO operation in contrast media. This ensures a high entry barrier and the long-term contracts provide revenue visibility to the company. Blue Jet is the leading operator from India in the space. The new capex being incurred to add 50 per cent more capacity is also driven by the same visibility and should be commercialised by FY25-26.  

Modest scope

Blue Jet’s 1 per cent share in global contrast media sales, implies a fair share for an intermediates supplier with a modest scope for further expansion. The primary growth driver is the increasing penetration of contrast media in emerging markets. At present close to 76 per cent of contrast media sales are in the US, Europe-5 and China which implies a long runway for growth in other markets. With entrenched relationships, Blue Jet can gain volume growth from EM penetration of the formulation makers.

The HIS business caters to FMCG, beverages, pharmaceuticals and food additives industry. This segment with 300-500 times sweeter and no calorie addition, will face higher penetration in an increasingly diabetic demographic. The product specification aspect applies to HIS business as well and Blue Jet which supplies to large FMCG clients has established itself in the segment. The growth of the end market should ensure strong growth for the segment.

CDMO business

With a close client relationship in contrast media industry which has a pharmaceutical wing as well, Blue Jet management thinks of the CDMO segment as a natural extension of operations. The segment accounts for only 5 per cent of FY23 revenues and is still a growing business. Blue jet works with innovators or partners larger CDMO’s in developing intermediates for pharmaceutical products in development.

The company has switched to working on end-stage molecule development projects from early-stage projects to increase traction. The company currently supplies four intermediates to patented products apart from new development projects in the works. The segment can improve traction and can be monitored in the next few years.

Financials and valuation

Blue Jet reported a 5 per cent revenue growth in FY23 to ₹720 crore with an EBITDA margin of 30 per cent. The margins have contracted from 36 per cent in FY22 impacted by an escalation in raw material costs in FY23 which was common in the industry. The company can be expected to maintain an EBITDA of 30-35 per cent with the niche portfolio of products.

The company is a zero debt one and expects to complete the current capex with internal accruals. From 200 KL capacity in FY18-19, the company ramped it up to 1,000 KL in FY23 and expects to further increase it to 1,500 KL by FY25.

The company growth prospects, while good, are tied to larger GDP growth and demographic factors. At 37.5 times FY23 earnings, the ask rate for Blue Jet with such growth profile seems to be on the higher side. The CDMO operations have potential but unless a portfolio of 30-40 projects are signed on the segment, it may continue to face headwinds.

COMMENT NOW