IPO Note | Pharmaceutical
July 24, 2015
Syngene International Limited
AVOID
Issue Open: July 27, 2015
IPO Note
Issue Close: July 29, 2015
Incorporated in 1993 as a subsidiary of Biocon Limited, Syngene is a leading
custom research and manufacturing organization, which supports R&D programs
Issue Details
from lead generation to clinical supplies. At the higher price band of `250/share,
Face Value: Rs10
the implied P/E would be ~23x FY2017E compared to the average P/E of
Present Eq. Paid up Capital: `19.9cr
17-22x for its global large peers. Thus, given little valuation comfort and the
Offer Size: 528cr-550cr Shares*
associated risks, we recommend an Avoid on the IPO.
Post Eq. Paid up Capital*: `22.1cr
Well placed in the CRO Industry: Since its formation, the company has emerged
as a key player in the CRO Industry. The global CRO market for discovery and
Issue size (shares): 2.2cr
development services was estimated to be ~US$43.5bn in 2014 and is expected
Price Band: `240-250
to reach US$67.3bn in 2018, reflecting a CAGR of ~11.6% (2014-2018),
Promoters holding Pre-Issue: 85.5%
according to a report by IQ4I.
Promoters holding Post-Issue: 74.5%
Syngene’s operational track record, successful delivery of projects,
responsiveness, process innovation, turnaround times, and productivity has
facilitated the strengthening of its client base (mainly outside India with exports
Book Building
contributing 97.2% of sales in FY2014). Over the past 20 years, Syngene has
built significant credibility and a regulatory track record in various therapeutic
QIBs
At least 50%
platforms and service models. It is now catering to 8 of the top 10 innovators
Non-Institutional
At least 15%
globally including BMS, Abbott and Baxter. Syngene boasts of a healthy track
Retail
At least 35%
record in the industry with a market share of ~2.0%. The company has been
reporting a Sales and PAT CAGR of 28% and 59%, respectively, with healthy
EBITDA margins of 30-33% over FY2011-2015. Going forward, with the industry
Post Issue Shareholding Pattern
growing at 11-12%, we believe the company can clock a healthy 18-20% growth
Promoters Group
0.745
given the Indian cost advantage (cost of conducting clinical trials in countries,
MF/Banks/Indian
such as China, India and Indonesia, is 25-40% less expensive than in western
FIs/FIIs/Public & Others
0.255
countries), though it needs a better diversification of clientele base to ensure a
better consistency in the same.
Syngene to invest US$200mn: Syngene plans a US$200mn capex over the next
three years. Of US$200mn, US$100mn will be incurred on the development of
oral dosages, MAb facilities, phase 2 of Malaysia insulin facility and research lab
in Bangalore, while the balance US$100mn will be utilized for Greenfield
expansion in Mangalore. The company plans to evolve from a CRO to a CRAMS
player. It has entered into three long term contracts with two clients for
commercial manufacture of their novel small molecules, of which, one is under
late stage development, while the other two are in various stages of clinical
development.
Risk stems from overdependence on few clients: Around 45% of Syngene’s total
sales come from its top 3 clients - BMS, Abbott and Baxter, of which BMS alone
contributed 30% in FY2015. Besides, its top 10 clients accounted for ~71% of its
total sales in FY2015. However, the company has managed to scale up its client
Sarabjit Kour Nangra
base from 103 in FY2012 to 221 in FY2015, indicating a gradual reduction in
+91 22 3935 7800 Ext: 6806
top 10 clients revenue contribution from 79% in FY2012 to 71% in FY2015.
Please refer to important disclosures at the end of this report
1
Syngene International Limited | IPO Note
Outlook and Valuation:
Syngene, given its leading position in the CRO industry, can continue to log in a
robust growth, given that it is the leading Indian player in the industry. Thus, while
the industry is expected to grow at 11-12% the company can log in around 18-
20% growth in the near term. Also, the company plans to utilize its cash flows into
the contract manufacturing segment, to emerge as a complete CRMAS player.
Also, the company has been consistent in its growth and profitability profile,
posting ROEs of 25.0% and ROIC upwards of 35.0%.
However, on the flip side the company has very high dependence on few clients,
with around 45% of sales coming in from its top 3 clients, with one client
contributing
30% of sales. This, coupled with the valuations of
~22-23.3x
FY2017E ( at `240-250), makes the IPO fairly valued. Its comparable peers in
India and internationality, which are much larger in size with ROEs in the range of
20-27%, trade at ~17-22x FY2017E earnings. Thus we recommend avoiding the
issue.
Key Financials
Y/E March (` cr)
FY2012
FY2013
FY2014
FY2015E
Net Sales
417
550
700
860
% chg
29.5
32.0
27.2
23.0
Net Profit
71
102
135
166
% chg
161.0
43.8
32.0
23.2
EBITDA (%)
32.9
30.6
30.6
30.6
EPS (`)
3.2
4.6
6.1
7.5
P/E (x)
77.8
54.1
41.0
33.3
P/BV (x)
18.5
10.6
8.3
5.7
RoE (%)
27.4
25.0
22.9
20.5
RoCE (%)
31.3
23.1
20.7
20.7
EV/Sales (x)
13.2
9.7
7.3
5.5
EV/EBITDA (x)
40.2
31.7
23.9
18.0
Source: Company, Angel Research, Price at upper band of `250
July 24, 2015
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Syngene International Limited | IPO Note
Research Team Tel: 022 - 39357800
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July 24, 2015
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