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  • CMP : 658.6 Chg : -0.45 (-0.07%)
  • Target : 710.0 (18.53%)
  • Target Period : 12-18 Month
Result Update

22 Jul 2022

Order win vindicates capabilities; execution to be the key…

About the stock:

Syngene is a contract research, development and manufacturing organisation catering mainly to global innovator pharma\chemical companies offering integrated scientific services from early discovery to commercial supply.

  • Syngene serves these players, which outsource some or substantial part of their business in the product development life cycle and operates via full time equipment (FTE) and fee for services (FFS) models
  • Discovery services: FTE engagements with high renewability; Dedicated services: Long-term strategic alliances that last usually five years or more, Development and manufacturing: FFS engagements, which increase in volume/scale over time
Q1FY23 Results:

Remdesivir base in Q1FY22 reflects in muted YoY numbers

  • Revenues grew 8% YoY to ₹ 644 crore [Ex-Remdesivir: up 30% YoY]
  • EBITDA margins de-grew 94 bps YoY to 26.8%, EBITDA was at ₹ 173 crore
  • Net profit was at ₹ 74 crore (down 4% YoY)
What should investors do?

Syngene’s share price grew ~2x over past three years.

  • Maintain BUY as the recent Zoetis agreement provides vindication in Syngene’s capabilities which could be an inflection point to evolve from clinical scale to commercial scale manufacturing for innovators.
Target Price & Valuation:

We value Syngene at ₹ 710 i.e. 25x FY24E EV/EBITDA 

Key triggers for future price performance:
  • Regulatory approvals from regulated markets for Mangalore facility (FY24) and Librela manufacturing for Zoetis (H2FY23)
  • Multiple year extension of Amgen, BMS, Baxter contracts makes it well poised to capitalise on growing opportunities globally
  • SynVent, Syngene’s Integrated Drug Discovery (IDD) platform ability to expand business from existing clients and attract new clients
  • Expansion of Biopharma manufacturing business by commissioning cGMP microbial facility and expanding the mammalian cell manufacturing facility
Alternate Stock Idea:

Apart from Syngene, in CRO/CRAMS space we like Divi’s.

  • Divi’s stays a quintessential play on Indian API/CRAMs segment with its product offering, execution prowess
  • BUY with a target price of ₹ 4655

Particulars

Particulars (₹ crore) Amount
Market Capitalization 26,535.5
Debt (FY22) 1,022.0
Cash (FY22) 518.0
EV 24,552.0
52 week H/L (₹) 895.8/599.6
Equity Capital 402.5
Face Value (₹) 10.0

Price Chart

Recent Event & Key Risks

  • 10-year agreement with Zoetis for commercial manufacturing of Librela
  • Key Risk: (i) Delay in capex execution (ii) Negative regulatory outcome

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues (| crore) 1,825.6 2,011.8 2,184.3 2,604.2 16.7 3,120.2 3,744.1 19.9
EBITDA (| crore) 535.8 617.8 671.8 796.1 14.3 925.9 1,124.2 18.8
EBITDA margins (%) 29.3 30.7 30.8 30.6 - 29.7 30.0 -
Adjusted Net Profit (| crore) 330.8 366.1 382.1 426.5 8.2 463.0 585.0 17.1
EPS (|) 8.3 9.2 9.6 10.6 - 11.5 14.6 -
P/E (x) 72.4 58.2 59.2 60.8 - 51.9 41.1 -
RoE (x) 16.8 16.8 13.5 12.9 - 12.4 13.7 -
RoCE (%) 14.8 14.5 11.5 11.7 - 12.8 15.2 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: Steady growth on high base

  • Revenues grew 8% YoY to | 644 crore driven by continued momentum in Dedicated and Discovery services and incremental contribution from Development and Manufacturing services. 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 | 173 crore. Net profit declined 4% YoY to | 74 crore. Delta vis-à-vis EBITDA is mainly due to higher depreciation, tax and interest expenses.
  • Syngene’s Q1FY23 revenues growth was on a high base due to sales of Remdesivir in Q1FY22. Excluding the one-off sales, top-line grew ~ 30% YoY. 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.
  • 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. Operating investments in FY23 will focus on building new scientific capabilities, IT and digitization initiatives along with expanding presence in client locations in US, Europe and other key markets. This will lead to additional cost in the P&L and will put pressure on margins but the operating leverage from improved performance from the development and manufacturing business will provide a balancing factor for EBITDA margins to be around 30%.
  • Going ahead, Syngene’s revenue mix is expected to showcase visible shift towards development and manufacturing business, with manufacturing starting to make a more prominent role while Syngene remains a compelling play in the CRO space with elite client profile and is well positioned for sustainable growth.

Q1FY23 Earnings Conference Call highlights

  • Management indicated that Q1FY23 was on expected lines due to high base of remdesivir sales. Q1FY23 witnessed good traction for development and manufacturing services. Growth is likely to pick-up across the year and guidance has been raised to high teens mainly due to currency depreciation.
  • Syngene has signed a 10- year agreement with Zoetis. The new agreement initially focuses on the commercial manufacturing of drug substance for Librela, a first-of-its-kind injectable monoclonal antibody used for the alleviation of pain associated with osteoarthritis in dogs. The agreement, initially centred 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. The multi-year agreement marks an inflection point for the Development and Manufacturing Services divisions. This is a major strategic step for biologics business and gives Syngene a pathway towards FDA and EMA regulatory approvals anticipated later in FY23. This agreement is to benefit revenues largely in FY24.
  • Supply chain issues which impacted Biologics last year continued in Q1FY23. Syngene has invested US$50 million in biologics and another US$30 million capex is earmarked for Biologics in FY23. At full capacity utilization, Biologics business is expected to generate an asset turnover of about 1x. Increased operating leverage for manufacturing services is likely to be witnessed from FY24.
  • Syngene has fully hedged receivables in advance and hedge rate for Q1FY23 was at 78 |/US$. In constant currency terms revenue grew 25% YoY ex-Remdesivir. Depreciating currency improved top-line in Q1FY23 while not benefitting EBITDA which was further aggravated by forex loss, thus leading to 50bps YoY decline in EBITDA margins.
  • There was high raw material cost in base of Q1FY22 due to remdesivir sales last year which is reflected in gross margins improvement in Q1FY23. Management indicated raw material as % of sales to remain around 26-27%.
  • Other Costs: Staff cost increased to 28.2% of sales due to annual increments while power cost increased to 2.6% of sales due to new facilities, inflation and power shutdowns. On YoY terms, other expenses increased as there was restricted activity last year along with 1) new facilities and equipment’s, 2) normalized commercial activities and 3) inflationary environment this quarter. Overall management believes this to be in line with expectations and re-iterated guidance for 30% EBITDA margins.
  • Mangalore facility is likely to take another 12 months for regulatory approvals. Syngene is expecting to maintain higher inventory levels amid increasing manufacturing services.
  • Syngene established a kilo lab for polymer and speciality materials in the Development Services division to shorten the development timelines for clients who look for customizable and flexible systems to expedite formulation and process development services.
  • As part of phase III expansion in Hyderabad, a lab was commissioned with over 150 scientists dedicated to PROTACs, a targeted protein degradation technology that offers therapeutic interventions not achievable with existing drug discovery approaches. PROTAC is part of Syngene’s novel drug discovery strategy for clients involved in treatment for cancer.
Vriance Analysis

  Q1FY23 Q1FY23E Q1FY22 YoY (%) Q4FY22 QoQ (%)   Comments
Revenue 644.5 683.7 594.5 8.4 758.1 -15.0   Excluding Remdesivir sales in Q1FY22, YoY growth at 30%
Raw Material Expenses 161.2 193.7 194.6 -17.2 214.8 -25.0    
Gross margins 75.0 71.7 67.3 772 bps 71.7 332 bps   YoY incresae due to higher cost associated with Remdesivir raw material in Q1FY22
Employee Expenses 186.1 188.5 171.1 8.8 173.6 7.2   YoY increase largely reflects annual increaments
Other Expenditure 124.4 98.4 63.8 95.0 119.4 4.2   YoY increase amid minimal activity level in Q1FY22 which has normalised this quarter and additional facility & equipment cost in Q1FY23 due to Hyderabad and Bangalore
EBITDA 172.8 203.0 165.0 4.7 250.3 -31.0    
EBITDA (%) 26.8 29.7 27.8 -94 bps 33.0 -621 bps   YoY decline due to higher other expenditure
Interest  9.4 5.1 7.9 19.0 5.6 67.9    
Depreciation 86.1 92.9 74.7 15.3 80.3 7.2    
Other Income 15.5 13.9 12.3 26.0 14.7 5.4    
 PBT  92.8 118.8 94.7 -2.0 179.1 -48.2    
Tax  18.9 25.5 17.4 8.6 31.3 -39.6    
PAT before MI 73.9 93.2 77.3 -4.4 147.8 -50.0    
Net Profit 73.9 93.2 77.3 -4.4 147.8 -50.0   Delta vis-à-vis EBITDA is mainly due to higher depreciation, tax and interest expenses

Disclaimer

ANALYST CERTIFICATION

I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

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1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

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