DSIJ Mindshare

SYNGENE INTERNATIONAL: AN INVESTMENT OPPORTUNITY

Here Is Why:

  • SIL claims to be the foremost CRO in India and second-largest in Asia.
  • Around 97 per cent of SIL’s revenue is through exports while the remaining is derived from India.
  • On the financial front, SIL has reported healthy growth of 26 and 42 per cent revenue and earning CAGR over the last five years.

Syngene International (SIL) is one of India’s leading contract research organisations (CRO) and a part of Biocon. It will hit the capital market on July 27 with an initial public offer (IPO). The price band at which company is offering its share is Rs 240-250 and aims to raise Rs 550 crore inthe upper price band. As per the management, SIL is the foremost CRO in India and second-largest in Asia. The main objective of the issue is to enhance the company’s visibility and build a brand image among existing and potential clients. There is no fresh issue of equity shares and promoters will offer their shareholdings for sale.

SIL has a service-oriented business model. It provides its expertise in discovery and development over multiple domains across small molecules, large molecules, anti-body drug conjugates and Oligonucleotides. The business can be classified into full-time equivalent (FTE), fee‐for‐service (FFS) and dedicated infrastructure and other contracts (DIC), depending on the requirement of its clients. Up to 60 per cent of the company’s business is currently FTE and FFS while 40 per cent is from DIC. FTE is generally a long-term contract and SIL is paid on an annual basis while in FFS it gets paid a fee on providing specific output as part of service.

SIL’s business model depends on the outsourcing of research work by global pharmaceutical companies. Around 97 per cent of SIL’s revenue is through exports while the remaining is derived from India. The company has 221 clients as of now. The number of clients has increased from 111 in FY11 to 221 in FY15. However, the amount of business from 211 customers is only 30 per cent while the remaining 10 per cent customers make up for 70 per cent of the total business. SIL has long-term associations with some of the world’s leading global healthcare organisations like Abbott Laboratories (Singapore), Baxter International and Bristol-Myers Squibb. These are SIL’s top three clients which contribute around 45 per cent of the total revenue.

SIL intends to do capex of USD 200 million (Rs 1,270 crore) over the next 3‐4 years. Out of the total capex, USD 100 million would be for expanding its existing facilities and USD 100 million is for setting up a new facility at Mangalore. It plans to fund this through internal accruals and debt. As part of this expansion plan, SIL intends to evolve from a CRO into a Contract Research and Manufacturing Services (CRAMS) organisation with commercial-scale manufacturing capabilities. This it will achieve by leveraging its existing relationships with clients and provide forward integration on discovery and development activities.

On the financial front, SIL has reported healthy growth of 26 and 42 per cent revenue and earning CAGR over the last five years to Rs 860 crore and Rs 175 crore respectively ending FY15. During these five years, the EBITDA margins remain steady in the range of 30-33 per cent. The return ratio has improved from 15.7 per cent in FY10 to 23.3 per cent in FY15. The improvement in ROE is mainly due to higher sales’ growth and lower finance cost.

As for the valuation, at a higher price band the company is available at the current P/E of 28.4x post-issue equity share. There are no listed peers in India in this space. Wuxi Pharmatech is the No. 1 CRO in Asia and is trading at a P/E multiple of 30.3 times on a TTM basis, according to Bloomberg. That is similar to what SIL is asking for. Looking at the company’s fundamentals and valuation we believe subscribers should invest with a long-term investment perspective.

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