1QFY2018 Result Update | Pharmaceuticals
July 31, 2017
Syngene International
BUY
CMP
` 476
Performance Highlights
Target Price
`558
Y/E March (` cr)
1QFY18 1QFY17
% chg (yoy)
4QFY17
% chg (qoq)
Investment Period
12 Months
Net Sales
291
275
6.0
291
-0.1
Stock Info
EBITDA
96
89
8.1
100
-4.4
Sector
Pharmaceuticals
EBITDA Margin (%)
33.0
32.3
62 bp
34.5
-148 bp
Market Cap (` cr)
9,519
Adj. PAT
62
60
3.7
78
-20.9
Net Debt (` cr)
(259)
Source: Company, Angel Research
Beta
1.0
Result in line with expectations: Syngene’s net sales grew by 6% yoy to `291cr and
52 Week High / Low
663/405
PAT grew by 3.7% yoy to `62cr. EBITDA grew by 8.1% yoy to `96cr due to margin
Avg. Daily Volume
84,223
improvement led by superior business mix. EBITDA margin improved to 33% in
Face Value (`)
10
1QFY18 from 32.3% in 1QFY17. We had expected PAT of `61cr on the topline of
BSE Sensex
32,515
`296cr hence the result has met our expectations. What we like about the results
Nifty
10,077
is that the company has managed to come back to the growth in the quarter. In
3QFY17, ~10% of its Bangalore capacity got damaged in a fire incident which
Reuters Code
SYNN NS
led to poor set of results over last two quarters. In 4QFY17, company saw decline
Bloomberg Code
SYNG IN
in the topline, however with the marginal growth, we believe that company is
showing signs of recovery.
Shareholding Pattern (%)
Promoters
74.5
Company signs 1st commercial agreement, Amgen collaboration to expand:
An undisclosed Japanese company has signed a multiyear manufacturing
MF / Banks / Indian Fls
4.2
agreement with Syngene for one of Novel Chemical Entity in gastro intestinal
FII / NRIs / OCBs
12.8
segment which has been developed at Syngene’s facility. The potential of this
Indian Public / Others
8.4
molecule is unknown at this time. Amgen has also expanded its engagement
with Syngene from current
100 scientists to
185 scientists. Amgen’s
Abs. (%)
3m 1yr
*2yr
incremental revenue contribution will reflect from 4QFY18E.
Sensex
8.0
15.2
15.9
Outlook and valuation: At the CMP `476, Syngene trades at 23.0x its FY19E EPS.
Syngene
(7.6)
13.9
53.3
We like Syngene’s organic growth capabilities as well as increasing offerings. The
* Since Syngene listing
signing of the commercial manufacturing agreement and expansion of the
3-year price chart
Amgen agreement are the new positive developments. We rate Syngene ‘Buy’
700
with a price target of `558 (27.0x of FY19E EPS).
600
500
Key financials
400
Y/E March (` cr)
FY2016
FY2017
FY2018E
FY2019E
300
Net Sales
1,107
1,201
1,402
1,823
200
% chg
28.7
8.5
16.7
30.0
100
Net Profit
241
287
317
413
0
% chg
37.6
19.3
10.5
30.1
Aug-15
Jul-16
Jun-17
OPM (%)
34.4
33.9
32.7
36.0
Source: Company, Angel Research
EPS (Rs)
12.1
14.4
15.9
20.7
P/E (x)
39.3
33.1
30.0
23.0
P/BV (x)
9.3
6.7
5.6
4.6
RoE (%)
23.5
20.3
18.7
20.0
RoCE (%)
14.8
13.3
13.4
16.5
EV/Sales (x)
8.8
8.1
7.0
5.4
Shrikant Akolkar
EV/EBITDA (x)
25.5
24.0
21.4
15.1
022-3935 7800 Ext: 6846
Source: Company, Angel Research
[email protected]
Please refer to important disclosures at the end of this report
1
Syngene International | 1QFY2018 Result
Update
Exhibit 1: Quarterly financial performance
Y/E March (` cr)
1QFY18
1QFY17
% chg (yoy)
4QFY17
% chg (qoq)
Net Sales
291
275
6.0
291
-0.1
Raw-material cost
69
71
-2.9
81
-14.2
(% of Sales)
23.8
26.0
27.7
Staff cost
86
74
16.4
78
10.4
(% of Sales)
29.5
26.9
26.7
Other Expenses
40
40
-1.5
32
23.6
(% of Sales)
13.7
14.7
11.1
Total Expenditure
195
186
5.1
191
2.2
Operating Profit
96
89
8.1
100
-4.4
OPM (%)
33.0
32.3
34.5
Interest
5.3
5.2
1.9
2.8
89.3
Depreciation
32
27
19.9
31
2.6
Other Income
17.2
15.9
8.2
23.9
-28.0
PBT (excl. Extr. Items)
76
73
4.3
90
-15.9
Extr. Income/(Expense)
0
0
0
PBT (incl. Extr. Items)
76
73
4.3
90
-15.9
(% of Sales)
26.1
26.6
31.0
Provision for Taxation
14
13
6.9
12
16.7
(% of PBT)
18.4
18.0
13.3
Reported PAT
62
60
3.7
78
-20.9
Adj PAT
62
60
3.7
78
-20.9
Adj. PATM
21.3
21.8
26.9
Equity capital (cr)
200
200
200
Reported EPS (`)
3.16
3.08
2.6
3.92
-21.0
Source: Company, Angel Research
July 31, 2017
2
Syngene International | 1QFY2018 Result
Update
Exhibit 2: Trend in the quarterly results
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
Net Sales
274.5
303.0
332.1
291.3
291.1
Raw-material cost
71.4
78.5
91.1
80.8
69.3
(% of Sales)
26.0
25.9
27.4
27.7
23.8
Staff cost
73.9
76.7
80.1
77.9
86.0
(% of Sales)
26.9
25.3
24.1
26.7
29.5
Other Expenses
40.4
42.2
48.1
32.2
39.8
(% of Sales)
14.7
13.9
14.5
11.1
13.7
Total Expenditure
185.7
197.4
219.3
190.9
195.1
Operating Profit
88.8
105.6
112.8
100.4
96.0
OPM (%)
32.3
34.9
34.0
34.5
33.0
Interest
5.2
2.7
6.8
2.8
5.3
Depreciation
26.6
27.8
28.8
31.1
31.9
Other Income
15.9
16.3
14.6
23.9
17.2
PBT (excl. Extr. Items)
72.9
91.4
91.8
90.4
76.0
Extr. Income/(Expense)
0.0
0.0
0.0
0.0
0.0
PBT (incl. Extr. Items)
72.9
91.4
91.8
90.4
76.0
(% of Sales)
26.6
30.2
27.6
31.0
26.1
Provision for Taxation
13.1
16.7
17.4
12.0
14.0
(% of PBT)
49.3
55.4
62.9
38.7
53.6
Reported PAT
59.8
74.7
74.4
78.4
62.0
Adj PAT
59.8
74.7
74.4
78.4
62.0
Adj. PATM
21.8
24.7
22.4
26.9
21.3
Equity capital (cr)
200.0
200.0
200.0
200.0
200.0
Reported EPS (`)
3.1
3.8
3.8
3.9
3.2
Source: Company, Angel Research
July 31, 2017
3
Syngene International | 1QFY2018 Result
Update
Story in charts
Exhibit 3: Revenue showing signs of recovery
Exhibit 4: EBITDA margins improves 63bps yoy,
350
40.0
140
38.0
300
30.0
120
36.0
250
100
20.0
200
80
34.0
10.0
150
60
32.0
0.0
100
40
-10.0
30.0
50
20
0
-20.0
0
28.0
Net sales (` cr)
Sales growth (%)
EBITDA (`cr)
Margins (%)
Source: Company, Angel Research
Source: Company, Angel Research
Exhibit 5: PAT growth also bottoming out
Exhibit 6: Other income continues to remain high
100
60.0
30
10.0
50.0
25
80
8.0
40.0
20
60
30.0
6.0
15
20.0
40
4.0
10
10.0
20
2.0
0.0
5
0
-10.0
0
0.0
PAT (`cr)
Pat growth (%)
Other income (`cr)
as % of sales
Source: Company, Angel Research
Source: Company, Angel Research
Conference call - Key highlights
The damaged capacity will come back online in 1QFY19E. The company has
assessed the total claim
FY19E is expected to see mid teen growth rate.
Amgen engagement expansion will see double the R&D infrastructure from
current 25,000ft2 to 50,000ft2 with wider scope in R&D activities.
Syngene has appointed Vinita Bali as a Non-Executive Independent Director
and Sebi Chacko as Chief People Officer.
Company felt the headwinds on account of FX with average dollar realization
reducing to `64.5 from, `67.0 in 1QFY17.
During the quarter, company has reported margin improvement owing to the
better sales mix. Staff cost grew by 16% due to the salary revisions. The hiring
related to Amgen expansion is yet to be completed; hence there could be
some increase in the staff costs in the remainder of the year.
July 31, 2017
4
Syngene International | 1QFY2018 Result
Update
The biologics facility will be operational by next quarter and expects the
Mangalore facility to be live as per revised schedule (early FY20)
Company has indicated that it will have no problem in getting price hikes
when the contracts are renewed. It has said that it has able to pass on the
price hikes successfully in the past. The price revisions take place in January.
The company has indicated that the NCE for Japanese company will be
manufactured at the Bangalore facility initially and higher demands will be
completed from Mangalore facility when completed.
Company has said that the capex required for the Amgen expansion is taken
care in $200mn capex plan already.
Company has indicated of $50mn capex in FY18E.
The total value of the damaged facility has been assessed to be `300cr and
company will file the claim in 2QFY18E and expects claim reimbursement of
`200cr in either 4QFY18E or 1QFY19E.
Company continues to remain bullish on the biologics business.
The management in 4QFY17 had guided of lower margins in FY18E due to
additional expenditure in the areas of business development and safety. While
in this quarter margins were intact, the remainder will have some margin
impact.
July 31, 2017
5
Syngene International | 1QFY2018 Result
Update
Investment arguments
Unique investment opportunity in drug research business: While almost all
Indian pharma companies are in generic drugs business, Syngene is helping
its clients to invent new drugs. It has 8 of the top 10 global pharma companies
as its clients and has long term contracts with some big pharma companies
hence we believe that Syngene hence is a unique investing opportunity in drug
research business.
CRO is an attractive business: Syngene operates in an attractive business with
several growth drivers. The rising cost of drug research is a tailwind for the
sector as this has prompted innovative pharma companies to outsource their
R&D to low cost alternatives. Global R&D spend by pharma is set to grow from
$150bn in 2015 to $172bn in FY2020. The CRO industry can grow from
$31.4bn in 2015 to $56.4bn by 2021 indicating a rising pie of outsourcing in
the innovative R&D.
Syngene has constantly evolved to capture opportunities: Syngene has
acquired a critical mass to become a sizable player in the industry. It is
already seeing rise in the dedicate R&D centers and with opening of new
facilities, long term contracts should increase going ahead. Company has
capacity in both chemical and biologics drugs and it is also forward
integrating in API manufacturing which we believe is a scalable opportunity.
Earnings expected to grow in FY19E: Syngene reported weak performance in
FY17 due to ~10% loss of facility in a fire incident in 3QFY17. While this is
expected to impact 1HFY18E revenues, recovery is expected from 2HFY18E.
The first quarter growth of 6% in FY18 indicates that the company is seeing
recovery in the business. Also with the expansion of Amgen engagement, the
revenue/PAT recovery should happen faster. We expect FY19E
revenue/PAT/ROE at `1,823cr/ `413cr/20% respectively.
July 31, 2017
6
Syngene International | 1QFY2018 Result
Update
Outlook and valuation
At the CMP `476, Syngene trades at 23.0x its FY19E EPS. We like Syngene’s
organic growth capabilities as well as increasing offerings. The signing of the
commercial manufacturing agreement and expansion of the Amgen agreement
are the new positive developments. We rate Syngene ‘Buy’ with Price target of
`558 (27.0x of FY19E EPS).
Company background
Established in 1994, Syngene International Limited is one of India’s largest and
Asia’s second largest Contract Research Organizations (CRO). It is a full service
CRO and provides the entire services basket for drug development, from discovery
to development stage and also has small scale manufacturing facility to support
clinical trial level supplies. Syngene has established a robust track record across
the discovery and development chain and has established itself as a leading CRO.
The company offers its services for novel molecular entities (NMEs) across
industrial sectors like pharmaceutical, biopharmaceutical, biotechnology, etc.
Along with small molecule development, Syngene offers biologics discovery and
development platforms, which contribute significantly to the R&D efforts of
biotechnology focused partners
July 31, 2017
7
Syngene International | 1QFY2018 Result
Update
Profit and loss statement
Y/E March (` cr)
FY16
FY17
FY18E
FY19E
Total operating income
1,107
1,201
1,402
1,823
% chg
28.7
8.5
16.7
30.0
Total Expenditure
727
793
943
1,167
Cost of Materials
310
322
372
487
Personnel
249
309
372
418
Others Expenses
167
163
199
262
EBITDA
380
408
459
656
% chg
35.3
7.2
12.6
42.9
(% of Net Sales)
34.4
33.9
32.7
36.0
Depreciation& Amortisation
97
114
123
184
EBIT
283
293
336
472
% chg
41.8
3.6
14.7
40.3
(% of Net Sales)
25.6
24.4
24.0
25.9
Interest & other Charges
8
18
20
20
Other Income
6
71
64
46
(% of PBT)
2.2
20.4
16.8
9.3
Recurring PBT
281
347
380
498
% chg
38.1
23.3
9.7
30.9
Prior Period & Extra. Exp./(Inc.)
-
-
-
-
PBT (reported)
281
347
380
498
Tax
40
59
63
85
(% of PBT)
14.3
17.1
16.5
17.0
PAT (reported)
241
287
317
413
Add: Share of earnings of asso.
-
-
-
-
Less: Minority interest (MI)
-
-
-
-
PAT after MI (reported)
241
287
317
413
ADJ. PAT
241
287
317
413
% chg
37.6
19.3
10.5
30.1
(% of Net Sales)
21.8
23.9
22.6
22.7
Basic EPS (`)
12.4
14.8
16.4
21.3
Fully Diluted EPS (`)
12.1
14.4
15.9
20.7
% chg
37.6
18.8
10.5
30.1
July 31, 2017
8
Syngene International | 1QFY2018 Result
Update
Balance sheet statement
Y/E March (` cr)
FY16
FY2017P
FY18E
FY19E
SOURCES OF FUNDS
Equity Share Capital
200.0
200.0
200.0
200.0
Reserves& Surplus
824.7
1,213.1
1,501.5
1,866.1
Shareholder's Funds
1,025
1,413
1,701
2,066
Minority Interest
-
-
-
-
Total Loans
891.0
787.0
801.0
801.0
Other long-term liabilities
53.5
51.7
67.3
87.5
Long-term provisions
18.1
19.9
22.4
29.2
Total Liabilities
1,987
2,272
2,592
2,984
APPLICATION OF FUNDS
Gross Block
1,111.4
1,331.9
1,752.4
2,299.2
Less: Acc. Depreciation
531.2
521.5
644.2
828.1
Net Block
580
810
1,108
1,471
Capital Work-in-Progress
236.8
174.9
400.0
350.0
Investments
276.6
540.4
350.4
455.7
Other noncurrent assets
132.1
201.7
199.0
258.8
Current Assets
1,058
983
949
1,006
Inventories
37.7
32.2
46.1
59.9
Sundry Debtors
185.2
198.7
253.5
339.6
Cash
719.9
527.3
497.8
409.6
Loans & Advances
83.4
117.4
42.1
54.7
Other Assets
31.9
107.1
109.3
142.2
Current liabilities
368.2
502.1
478.0
621.5
Net Current Assets
690
481
471
384
Deferred Tax Asset
71.7
63.7
63.7
63.7
Deferred Tax Liability
-
-
-
-
Total Assets
1,987
2,272
2,592
2,984
July 31, 2017
9
Syngene International | 1QFY2018 Result
Update
Cash flow statement
Y/E March (` cr)
FY16
FY17
FY18E
FY19E
Profit before tax
281
362
380
498
Depreciation
97
114
123
184
Change in Working Capital
-26
37
-20
-2
Interest / Dividend (Net)
-5
3
20
20
Direct taxes paid
-40
-74
-63
-85
Others
0
-45
0
0
Cash Flow from Operations
308
397
441
615
(Inc.)/ Dec. in Fixed Assets
-293
-293
-646
-497
(Inc.)/ Dec. in Investments
-126
-216
193
-165
Cash Flow from Investing
-419
-509
-453
-662
Issue of Equity
0
0
0
0
Inc./(Dec.) in loans
742
-64
32
27
Dividend Paid (Incl. Tax)
-24
1
-29
-49
Interest paid
-1
-17
-20
-20
Cash Flow from Financing
716
-80
-17
-42
Inc./(Dec.) in Cash
606
-192
-30
-88
Opening Cash balances
115
720
527
498
Closing Cash balances
720
527
498
410
July 31, 2017
10
Syngene International | 1QFY2018 Result
Update
Key ratios
Y/E March
FY16
FY17
FY18E FY19E
Valuation Ratio (x)
P/E (on FDEPS)
39.3
33.1
30.0
23.0
P/CEPS
28.0
23.7
21.6
15.9
P/BV
9.3
6.7
5.6
4.6
Dividend yield (%)
0.2
0.2
0.3
0.5
EV/Sales
8.8
8.1
7.0
5.4
EV/EBITDA
25.5
24.0
21.4
15.1
EV / Total Assets
4.9
4.3
3.8
3.3
Per Share Data (Rs)
EPS (Basic)
12.4
14.8
16.4
21.3
EPS (fully diluted)
12.1
14.4
15.9
20.7
Cash EPS
17.0
20.1
22.0
29.9
DPS
1.0
1.0
1.5
2.5
Book Value
51.2
70.7
85.1
103.3
Returns (%)
ROCE
14.8
13.3
13.4
16.5
Angel ROIC (Pre-tax)
41.5
30.6
26.8
28.6
ROE
23.5
20.3
18.7
20.0
Turnover ratios (x)
Asset Turnover (Gross Block)
1.0
0.9
0.8
0.8
Inventory / Sales (days)
12
10
12
12
Receivables (days)
61
60
66
68
Payables (days)
25
31
27
27
Working capital cycle (ex-cash) (days)
49
39
51
53
July 31, 2017
11
Syngene International | 1QFY2018 Result
Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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Disclosure of Interest Statement
Syngene International
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
July 31, 2017
12