Syngene is a contract research organization/subsidiary (CRO) of Biocon, planning to raise Rs.550 cr from its IPO. Syngene is planning further for commercial manufacturing (forward integration) space and will spend around $200 million over the next two/three years. The capex will be invested mostly in setting up of new manufacturing capacity (at Mangalore) and expanding of existing facilities. After the setting up, Syngene will be a full-fledged contract research & manufacturing service player (CRAMS).
Some inputs & possible risks:
- This is basically is an offer for sale (OFS), where the parent Biocon is selling (de-levaraging) its stake (from 84% to 74%) and the whole proceeds will go to Biocon and Syngene (i.e. more positive for Biocon scrip in the short term).
- Syngene will further fund the planned expansion through internal accruals & debt.
- Presently, Syngene has two business models: R&D and clinical supply of biopharma/biosimilars (60% revenue) and get around 40% revenue (from contract research) in the form of fees for service for full time/equivalent dedicated centres, which has primarily three large global pharma players (Baxter, Abbott and Bristol-Meyer Squibb).
- The above dependance of 40% revenue from three clients may be a considerable risk, even any one of them pulls out in future (partially or fully) and may affect growth rate in revenue.
- Syngene's proposed foray into commercial manufacturing & diversification in future may help to contain such risk and ensure a stable revenue base.
- The custom/contract research market is huge and is growing around 11.5% pa, has now around $100 billion market globally.
- No doubt, there will be huge scope going ahead in CRO, but any slowdown in research by these global big pharma MNC(s) may adversely affect the CRO(S), like Syngene. But, considering US, which is fast getting out of "gloom & doom" situation and considerable health budget in other advanced economics, we could see incrementally higher investments in this sector for better health & life style across demographies.
- This is the only listed Indian CRAMS (contract research and manufacturing services) with little/nil competition.
- Company's promoter & its MD have been named respondents in a criminal & legal proceedings. An adverse outcome in any of these proceedings may affect the reputation and future business of the company. (Novartis sued Biocon for patent issue of anti diabetic drug Galvus).
- Last FY's audited balance sheet, showing contingent liabilities of around Rs.181cr may adversely affect the profitability of the company in future, if materializes.
- Around 97% of the revenue of Syngene comes from export and any unfavorable currency movements may pose some headwinds for the company.
- Syngene has considerable number of bright scientists, which is a major asset in its R&D wing, but the huge HR cost (nearly 5500 employee in its pay roll) may pose some threat in future if there is above average increase in employee cost & salary not supported by incremental higher revenue.
- Syngene's past financial performance has been robust with sales growing at around 28% annually for the last five years and OPM at around 30%. But, at the end of the day, EPS is around 6.70 & 8.80 (FY:14/15), translating an average EPS of around 7.75 & current PE of around 32 at IPO upper band of Rs.250. With an estimated EPS growth of around 20-25% in FY:16, the company is basically asking for a valuation(PE) of around 22-25 times of its projected earnings (EPS @9.75).
- The EBITDA & ROE is well supported by incrementally higher sales growth and lower finance cost, which may be sustainable in future also.
- Comparing with its nearest Chinese rival (WuXi), if we assume an average PE of around 22 for the projected FY:16 EPS of 9.75, the fair valuation of Syngene might be around 215 (9.75*22).
- But, in practical, Indian market is traditionally at higher premium over its Asian counterpart and "safe heaven" appeal, specially after recent China market turmoil. Considering the average PE enjoyed by its near similar & comparable company (Divis Lab & SPARC), our market may assign an average PE of around 30-32 to Syngene upon/after listing as also "Bangalore" stamp is there ( now an unique appeal of "start ups & innovations", where the parent Biocon starts with mere Rs.10k in a rented garage decades ago and Infy also has similar story).
- Thus, after listing Syngene might be quoted as around 290-315 (9.75*30-32) by our market in the days ahead.
- By using PEG of 1, fair projected valuation of Syngene might also be around 300.
In brief, the bottom line is that after listing broad range of Syngene might be around 215-240-290-315 in the near term. It could give substantial return by next three years or so and investors having eye sight for long term, could partly subscribe to this issue (because, immediately after listing it may fall to some extent as there will be some concern of further dilution of stake by its parent, Biocon). Initial investors should be also prepared for that scenario also and may average in any substantial declines after listing.
As par BG metrics, current median valuation of Syngene may be around 230 and projected valuations might be around 260-290-325 (FY:16-18).
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | LONG TERM | SHORT TERM | MEDIAN VALUE | 200-DEMA | 10-DEMA |
| SYNGENE | 7.75 | 100.00 | 30.00 | 223.58 | 236.22 | 229.90 | 215 | 240 |
| SYNGENE | 9.75 | 118 | 30.00 | 250.77 | 264.95 | 257.86 | 215 | 240 |
| SYNGENE | 12.25 | 142.5 | 30.00 | 281.09 | 296.98 | 289.04 | 215 | 240 |
| SYNGENE | 15.35 | 171 | 30.00 | 314.65 | 332.45 | 323.55 | 215 | 240 |
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