Unique investment opportunity in drug research business: While almost all Indian pharma companies are in generic drugs business, Syngene supports its clients to invent new drugs. It has 8 of the top 10 global pharma companies as its clients and also has long term contracts with some big pharma companies. In our view Syngene provides 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 spends by pharma companies is set to grow from $150bn in 2015 to $172bn in FY2020. The CRO industry is estimated to grow from $31.4bn in 2015 to $56.4bn by 2020, indicating a rising pie of outsourcing in the innovative R&D segment.
Syngene has constantly evolved to capture opportunities: Syngene has acquired a critical mass to become a sizable player in the industry. It is already witnessing a rise in the dedicated R&D centers. Moreover, 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 FY2019E: Syngene reported weak performance in FY2017 due to ~10% loss of facility in a fire incident in 3QFY2017. While this would impact 1HFY2018E revenues, recovery is expected from 2HFY2018E. We expect FY2019E revenue/PAT/ROE at Rs1,829cr/ Rs418cr/21.6% respectively.
Outlook & Valuation: At the CMP of `478, Syngene trades at 23.0x its FY2019E EPS. We compare Syngene with its Chinese peer WuXi PharmaTech, which before delisting, traded at ~24x. While WuXi’s growth was fueled by acquisitions, Syngene’s is mostly an organic growth story and has headroom for both organic (capacity utilization) and inorganic growth. We rate Syngene ‘Buy’ with Price Target of Rs 564 (27.0x of FY2019E EPS).

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