Thanks Mahesh for pointers…Definitely I will go through earlier AR’s. Even DRHP document as well covers in detail about the industry dynamics. Although I have not read any other company DRHP doc, but I felt, they provided all the details as far as possible. The even listed many risks as well, which I thought were trivial.
Still am new to the financial ratios and will work towards it to understand your points,
As you said, it might get re-rated once some funds joins the party. And looking at the MNC competitor Quintiles, which is a Fortune 500 company with more than 25K employees(they even have a s/w dev center in Bangalore), Syngene has got a great future.
Am also invested in PI as well and the work you have done there is really marvelous and thanks for that.
I think, from your comment in PI thread, I came to know about Syngene.
Sreekanth…As explained by me earlier in this thread also, Suven’s business model is different…If I tell you frankly, in last many years I tried evaluating Suven thrice but every time I got turned down and decided against investing in this company…its not that there is any particular problem with the company but it doesn’t suit my concentrated investment approach…As far as comparison with Syngene is concerned, I fond Suven’s business model relatively more riskier as its majorly dependent on success of Suven’s research and that too in concentrated therapeutic area…no doubt success on that front could make it quite big but Suven’s approach so far seems to be more of an outlicensing…also, I try to stay away from managements who make noise of every small small things in the form of press releases to stock exchanges…otherwise industry feedback is not bad for Suven its just that it doesn’t suit my investment style…
Rgdg. MPS, it is getting attractive every passing day…at less than 14 times organic FY16e EV/EBITDA the stock has reached extremely attractive valuation zone and one right move on inorganic front could significantly rerate the stock thats what I believe…MPS seems to be in a sweet spot because of global turmoil which we all are witnessing…it has cash ready and it just need to spend it the right way without making any hasty decision…
@Mahesh I like both Syngene and Suven - both would be among my top 6-7 bets (if I was forced to take 6-7 bets). With Syngene, what I like more is that they are involved from discovery stage for many molecules. With Suven, what I like is that they have mind-blowing margins for CRM (ex their in-house research); inspite of their cash guzzling research, and assuming none of this fructifies, I still believe Suven is a very good business. If one wants to take the inhouse research into consideration for valuation, then I agree - Suven has no place in a concentrated portfolio. Syngene I feel is slightly overvalued at CMP, Suven is fairly valued.
@Vivek_6954 As Mahesh has mentioned, the 3 phases of clinical trials take 6-8 years, not even considering the discovery phase. So if a company enters this business today and if they get small contracts, the partner might see that they are doing good work after few years, but to build trust about privacy with the partner, and particularly in the industry would take a longer time. The other aspect is one would need to start with smaller number of scientists and increase as one gets more contracts. One can poach a handful of experienced scientists here-there but not a team as large as Syngene.
Q for scuttlebutt: How satisfied are the scientists at Syngene/Suven with their careers?
Discl.: No holding in Syngene or Suven. Recently sold off stake in Suven on realizing mistake that there is no MoS.
If venturing into commercial manufacturing is successful, then 5 years post start of commercial manufacturing, opportunity could be huge for this company…It will not be right to put any number to it but one can gauge the size from the fact that industry itself is likely to grow in double digits in foreseeable future.
Getting associated with an innovator for NME takes atleast 8-10 years of trust building…forget here the high quality standards you need to maintain and multiple inspections that you need to clear not only from regulatory authorities but also from the innovator.
Just wait for Sep.'15 shareholding vivek, its not far away…we might find good institutional holding in that shareholding disclosure. With rgds. to Columbia Pacific, you can find its details on https://www.columbiathreadneedleus.com …its heartening to see the fund investing more than 3 % of its corpus in Syngene…the fund seems to be a long term investor with many bluechip names in its holding…
One thing I have learned from my more than 14 years into financial markets is that never follow a single valuation multiple to evaluate a company…first look at the business, see if growth is there or is sustainable, look at the business model to check how important company is to its customers, see the margins it is working at and check if they are sustainable, check whether they are paper margins or are getting translated into actual cash, look at the future scenario from varied angles and check where company can go wrong…like this way there are multiple parameters which form the right valuation for a company.
I will explain you practically why this happens…valuation is a factor of demand and supply…if more long term investors get attracted to a particular company then it’s valuation will become far reacher as they see the valuation from financials at 4-5 years down the line and not now…what company has to do is surpass the milestones expected from it to be surpassed and again 4-5 years down the line valuation will again reflect financials of next 4-5 years…like this cycle will go on unless the company falters…this is true for well managed, blue chip companies like Page, PI and of course should soon happen to Syngene too…
As far as my assessment goes, once contract manufacturing starts and stabilises as expected, I expect Syngene to trade at premium to PI and Divis on all valuation multiples be it p/e, EV/ebitda, EV/sales, etc… The low free float of just 12.2 % should create a scarcity premium that’s what I believe as there are not many businesses with clear growth visibility coupled with high margin of operation and equally high cash generation.
@Mahesh Hi, Mahesh. Apart from the older annual reports of Syngene, can you suggest me some other reports which can improve understanding on this sector. I have been going through annual reports of Bristol Myers as well. I would like to understand the industry much better. Pharma isn’t my forte
I have few questions though, would be great if you can answer them -
What is it that can go wrong for Syngene? I don’t see anything negative listed in the thread and that kind of scares me.
In the entire thread, I only see financials being talked about (P/E, ROE, ROCE, Capex, EV etc.) but not enough discussion on what is company “actually” doing at the next level of detail. What are the name of the molecules? Who are their customers? Do we know which area the molecules are in (Dermatology? Paediatric? etc.)
Post stabilisation and successful venturing into commercial manufacturing, Syngene will be the only listed company in India having exclusive focus on NMEs and catering to the entire lifecycle of an NME…Since PI (CSM) & Divis operate with a similar model but lakc the presence in entire lifecycle, it is my personal expectation that Syngene should trade at premium to both the said companies. I can be wrong in my assessment.
Syngene is not a full fledged pharma company but is like a service-oriented company catering to pharmaceutical sector apart from others. To understand the segment in which Syngene is operating in, apart from company’s own past ARs as well as RHP, you can refer to past ARs of its Indian peers like GVK as also presentations, ARs and brokerage reports of its international peers like Wuxi.
Once any company’s management falters in walking the talk, I stop actively tracking the company as management quality and conduct is the highest weightage I put during my investment decision.
(1) Since Syngene has only recently came out with its IPO so risk factors are very well documented in RHP – you can refer that.
If you ask me then the biggest risk factor is not meeting the delivery schedules of customers is the biggest risk factor to me. NMEs are very sensitive contracts where if you falter on even one thing then customer suffers alot – even more than you --so margin of error is minimal in such contracts. This ofcourse I am talking about commercial manufacturing…having said these, it is because of this factor that inspections and checks are most stringent while catering to this segment and unless customer is working with you since last many years (in many cases decade) and is fully satisfied of your capability and integrity that he will enter into contract with you.
Second biggest risk factor is any mismanagement during CAPEX i.e., any delay or something, especially Mangalore plant once work starts there next year.
(2) Name of the molecules as well as many customers might not be talked in detail because of NDAs signed by the company because of confidentiality issues involved in the sector. If you have researched PIIND before then you must very well know this.
As far as what company is actually doing, as said before, RHP is filed only before two months and there is no point in discussing entire thing again here. Still from RHP if you don’t understand anything then here that can be explained lucidly.
Feel free to get back in case of any further query.
The major force driving Syngene would be increased R&D spending by global pharmaceutical companies. Also companies would focus more on decreasing costs and hence would partner companies like Syngene. By reading RHP the major risk i could ascertain was with regards to clients of Syngene. Since it is kind of service related work one needs to monitor what are the developments taking place with the major clients of Syngene for eg. Bristol Myers. M&A activities in pharmaceutical companies can lead to alteration of these contracts which could have a material impact on earnings. Also any change in policy by these companies can only be known by studying the client companies in detail
True Karan…apart from that if there is any GVK-type issue because of which there is disregard for a particular country like India could also affect business so is sharp depreciation of rupee, say it going to 75-78 could make it suffer hedging losses because of huge hedge contracts entered recently…
As far as dedicated centre business goes, atpresent it contributes ~36 % to the revenues but there might be more dedicated centres on the way once CMS business approaches stabilisation and that is the most stable business for the company since contracts are long term and provide for enough compensation. Company might be inclined to encourage more clients towards dedicated centres.
@Mahesh Foreign currency risk even though always present shouldn’t be a big factor. All exporters face such risks and their effect lasts at most for a couple of quarters and it evens out over the longer term so i don’t assign a lot of importance to it. If the management doesn’t have motives of making money from forex i would not feel rupee dollar rate to be a major risk going forward. A better idea would be understanding business risks playing out in the normal business operations
I was listing the possible things that can go wrong and it includes hedging risk also and in case of sharp depreciation of rupee against $ it might not go away in few quarters as hedges taken are more than double the size of current operation and must be spread over years…if you check forex losses trend over last few years then you will find over last 3 years company suffered cumulative losses of more than 100 cr. due to forex fluctuations…however, as you have rightly put, even I don’t assign much importance to forex issues since its a pure business hedge but since we are here searching what factors can go wrong then it could include forex also.
@Mahesh
I haven’t gone through the numbers as of now. This is a new sector for me so trying to understand the sector and other factors influencing the company. Thanks for pointing it out though.
