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Syngene's Zoetis order win vindicates capabilities; execution to be the key

ICICIdirect Research 22 Jul 2022 DISCLAIMER

What's Buzzing:

Syngene's Q1FY23 revenues was below I-direct estimates and erstwhile guidance of mid-teen growth from management as Covid 19 drug Remdesivir base effect weighed on revenues.

Context:

Revenues grew 8% YoY to Rs 644 crore driven by continued momentum in Dedicated and Discovery services and incremental contribution from Development and Manufacturing services. Excluding the Remdesivir sales in Q1FY22, top-line grew ~ 30% YoY. EBITDA margins declined 94 bps YoY to 26.8% mainly due to higher other expenditure being partly offset by higher gross margins (up 772 bps YoY to 75%). EBITDA grew 5% YoY to Rs 173 crore. Net profit declined 4% YoY to Rs 74 crore.

Our perspective:

Syngene's Q1FY23 revenues growth was on a high base due to sales of Remdesivir in Q1FY22. Management has raised the FY23 revenue guidance from mid-teen to high-teen due to rupee depreciation vis-à-vis US dollar and the recent agreement with Zoetis. The agreement, initially centered on Librela, paves the way for the development and manufacturing of other molecules in the coming years and is expected to be worth up to US$500 million over 10 years. Syngene continues to build capability and capacity in the research business by upgrading technology capabilities across platforms, therapeutic areas along with expansion for Hyderabad centre. Additional cost in the P&L will largely be offset by operating leverage from improved performance from the development and manufacturing business, guiding EBITDA margins to be around 30%. Regulatory approvals from regulated markets for Mangalore facility (FY24) and Librela manufacturing for Zoetis (H2FY23) will be key triggers for Syngene to evolve from clinical scale to commercial scale manufacturing for innovators.

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