Sequent Scientific - Indian story in Global Animal Pharma Space

nirvana_laha · February 12, 2022, 5:42am

Notes from Sequent concall. Manish Gupta helmed the call :

API

Barring any further Logistical challenges, they expect API revenues this FY to end flat on YOY basis, which means they are reasonably confident of 150 Cr sales in Q4 (Out of this 15Cr is spillover from last quarter)
Expect API business to show steady YOY growth of 20% from here on backed by contracts like the Top 10 Animal Health company contracts they won sometime back
Business from new contract is expected to be between 10-12mn USD annually, with FY23 seeing about 70-80% of this revenue. Supplies to start before Q2 FY23

Gross margin recovery

Expect to move towards FY21 margins from Q4 FY22 onwards. Full recovery of margins to FY21 levels will take more than a year as raw material prices are still quite elevated. But price pass throughs are taking effect and should speed up from Q4 onwards

Turkey

Erosion in shareholder equity due to Turkey operations was on account of devaluation of reserves in Turkey due to Lira depreciation
They believe worst of the depreciation is behind us and expect a Q4 exchange rate of INR 5.5/lira as opposed to an average exchange rate of INR 7.2/Lira which prevailed in Q3. This should give a revenue bump up of ~25% in INR terms from Turkish business even if Lira revenues remain flat QoQ
Turkey is a key market for Sequent and Manish reiterated that it will continue to remain a key market for them and there is no need to get spooked by temporary volatility. He expects the currency situation to stabilise soon and actual Sequent business operations to continue showing good strength in Turkey.

Capex

Bremer Project has been a casualty of Covid. They expect to invest ~40Cr more to finish the Project this year and don’t expect FDA approval before early next year. Those are the earliest timelines.
Apart from 40Cr in Bremer, they expect to invest 60Cr more in Brazil and other geographies in the coming FY for a total capex spend of 100Cr for FY23

Overall, I got the impression that barring any new headwinds, recovery should start from Q4 onwards and FY23 might see 18-20% growth in Formulations business and 25-30% growth in API business on YOY basis with anywhere between 10-12% post-ESOP EBITDA margins. FY24 onwards the business should start firing on all cylinders given Bremer will be up and running.

Q4 FY22 might give long term investors good chance to accumulate.

paragbharambe · February 12, 2022, 12:38pm

In addiion to the excellent notes producted by @nirvana_laha . Here are detail notes I have taken for myself after going through con call recording (thanks to researchbyte) for couple of hours. Hope others will find it useful.

Q4 Details notes:

Generally 1/3 of API business is contributed by Albandazol (human and animal pharma).
- Albandazol is used to deworm in school in Africa.
- WHO release orders to formulator. We produce API.
- Real change in WHO related demand led recovery.
- Around 10% of API is sales is related to WHO (around 45 cr/per annum).
Delayed API (shipment) in Q3 - around 15 cr. It was despatched from factory but was stuck of ports waiting for further movements.
Q4 ESOP cost will be 78 million
We guide in term of operating cost- Pre ESOP cost.
New new contract start around end of Q1.
Gross margin will take more than a year to recover to historical level.
We are living in hyper inflation environment and we see no reason to belive that we will be at a level (EBIT margin) what we had envisiged. But it may be 1 to 1.5 year down the line.
Change of guards (new CEO) impact:
- Sequent is an instutions.
- I do not beleive any change in stragy/direction due to change of guard. It will be just change of person.
Capex around 100 cr over next 18 months- Brazil/Germany/India
8/10 years back Brazil had a volatile currency but in last 4/5 years it has stablised. Turkey today is very volatie but shall become stable ahead. Due to long term structural growth outlook of Turkey, it balances out.
Due to Covid it is very diffcult to meet doctor physically- growth is challange. However once economcy opens up, we will recovery in new product and enhanced customer connect as the year go by.

API:

Expect 3 to 5 molecule commercialised per year.
Commercialised 3 product this year, but it does not have material impact on the business. Formulator has to use our API and then validate their product. So these products will reflect growth in 2 to 3 years time
What we have filed 2/3 years back is driving growth.
Once Albandazoile stabilises we shall see 20 growth from API business.

Growth Levels:

Passing on cost increases- showly but surely.
Internal cost control.
RM has started stabilising. They are not increasing.

Bremmer- Germany:

Delayed due to covid.
Scale up and upgrades.
Delayed by 18 months.
Will start work in April and will be offered to US FDA for inespection by end of the current year.
USFDA inspection next year (FY 24)

Strategy

Dull and drab industry and you need to get everthing to get your growth going.
Enhancing the basket.
Beatty of the industry - sustainable and profitable growth.
-Go deeper in existing molecule.
-Enter new market

Formulation:
Wild guess

What % of molecule we will be covering which are patnt expired,which we are covering- 15-20% of number of molecule.
API will be less than 10%. This were wild gussed as no one knew what is the exact number.

Latin America

Consistently outperforming due to Brazil. We have commerisiled more products
No one off.
Brazil has been growing consistently and gaining traction without much flucations.
Bought a company from bankruptcy and have grown it 5 times in last 5X years.
This is fully organic growth. Q4- there may be some inorganic growth (small) due to Nurie acquisition.

Turkey:

One of the significant animal health markets for us.
Recent events make us even more important due to local manufacturers.
We are making it as an export hub.
Today cost of manufacturing is less in Turkey than in India.
See significant improvements going ahead.
We are fully invested and looking forward to taking it forward.
EU approved format and other 8 manufacturing facilities.
We are targetting all markets except the US from this facility.
5-year view- Consistently outperforming business.
We believe it will continue to outperform going forward.
Other formulators who import will see an impact in FY23 as they already carry some inventory. However, they will struggle in FY23 as they import new products with a new currency rate. This will benefit Turkey business more in FY23 and after.

Pet Business:

India: Launched two months back. Doctor connectivity is very difficult to establish. It will take 12/18 months before it will start contributing any meaningful number
Brazil: Inorganic route. Reasonable contribution from FY23.
Turkey: Wait and watch for now.

Sanjeev_Bansal · February 12, 2022, 7:49pm

One interesting aspect of the concall- almost all the questions were asked by Individual investors. There were hardly any Institutions asking anything, looks like not many are tracking Sequent anymore. Even InCred didn’t show up (based on questions asked, may be they were not given an opportunity), though mr. Khemka mentioned recently that they own Sequent.

Although, lack of Institutional investors’ presence doesn’t mean the company is good or bad but it shows how company’s perception has changed after recent management changes. It would be interesting to see how company performs and if the perception change will be short term or more long term.

nirvana_laha · February 13, 2022, 3:33am

Saturday 9:30 AM also didn’t help with Institutional Investor participations I think

vishal_rajole · February 23, 2022, 1:28pm

Some selling happened from MD Manish Gupta and Jt MD Sharat Narasapur and CFO Tushar P Mistry

nirvana_laha · March 2, 2022, 5:08am

Nourie acquisition completed by Alivira Brazil.

Couple of important points from the acquisition note highlighted below

tanishq · March 2, 2022, 3:45pm

Does the company derive any revenue from Russia?

prashantrane2000 · March 12, 2022, 9:12am

75 lacs ESOPs for incoming MD , Almost 33 CR @CMP. Can anyone explain on what is Class A/B/C options?

Item No. 2: Grant of options of more than 1% of the issued capital to Mr. Rajaram Narayanan The Company is in the process of appointing Mr. Rajaram Narayanan as the Managing Director and Chief Executive Officer of the Company and the approval of the shareholders is being sought under Item 1 of this notice. As part of the remuneration package, Mr. Narayanan will be eligible for 40,00,000 Class A Options, 22,00,000 Class B Options and 900,000 Class C Options convertible into equivalent number of Equity Shares of INR 2/- (Indian Rupees Two only) each of Sequent Scientific Limited (the “Company”) at a price of INR 86/- (Indian Rupees Eighty Six only) per Equity Share under the SeQuent Scientific Employee Stock Option Scheme 2020 (‘the Scheme’). The effective date of the grant, if approved by the Shareholders, will be April 11, 2022. The total options proposed to be granted to Mr. Narayanan will aggregate to more than 1% of the issued capital of the Company.

Current package of Mr Rajaram is 4 Cr and he is be given comparable package for joining.

Remuneration proposed:
Mr. Narayanan will be paid a total remuneration of INR 4,00,00,000/- (Rupees Four Crore only) per annum including a variable pay upto INR 1,00,00,000/- (Rupees One Crore only) per annum for a period of three years effective April 11, 2022. Such remuneration will be paid from the Company and Alivira Animal Health Limited, a wholly owned subsidiary of the Company in proportion as decided by the Nomination and Remuneration Committee, however not exceeding INR 2,50,00,000/- (Rupees Two Crore Fifty Lakh only) from the Company.
Other perquisites (not included in total compensation):
a. Housing deposit as an advance of INR 1,25,00,000/- (Rupees One Crore Twenty Five Lakh only) against lease agreement furnished
b. Other Benefits as per the rules of the Company
Mr. Narayanan shall be given a joining bonus of INR 1,00,00,000 (Rupees One Crore only) along with the first month’s salary, to be refunded back to the Company in case he ceases to be in employment of the Company within one year.
Mr. Narayanan shall also be given an Additional Bonus of INR 1,00,00,000 (Rupees One Crore only) after 1st year of his employment.

To give comparison Laurus ED combined were drawing ~25 cr on profits 956 cr. Is sequent board is expecting new MD coming with exceptional skills to take Sequent much more that industry peers? This is getting interesting…

paragbharambe · March 12, 2022, 9:21am

Sequent is giving huge ESOP to the new CEO

He is getting 71, lakhs shares at @86 per share, the same price they gave to Manish Gupta- earlier CEO.

At the time of giving ESOP last year, sequent management said they are for talent retention and hence offered at Rs 86; the same price Carlyle bought the company. However, as the new CEO is joining much later, I am surprised that they offer i the same to him.

At CMP of 130- they are worth around 100 cr.

The CEO has a salary of 4-5 cr. So his interest is aligned to shareholders’ interest, but even if the share price does not perform well in the next 4/5 years - ESOP vesting duration- he will still earn the decent amount as his acquisition price is 86.

Also, there are no preconditions attached to these ESOP, in the sense to get them he has to deliver PAT growth or share price growth.

So just when shareholders were looking forward to a reduction in ESOP expenses in P&L, this shall hit again. I guess CEO ESOP cost shall impact next 4-5 quarters profit by at 6-10 cr per quarter (guesstimate).

Kailasa_Tiwari · March 12, 2022, 9:49am

Very informative Brother! We lose trust in such management.Retailer always pay the price.

Worldlywiseinvestors · March 12, 2022, 10:34am

Is it even worth it to hold such a business?

Someone on this thread asked me the reason for selling:- simply due to mindless dumping of cost over next 1-2 years. Esops or consultants being hired etc. This can be potentially interesting from 4 years+ horizon. My investing philosophy is more geared towards positive business momentum in the short to medium term (1-3 years).

Disc:- sold at 160s. Took a harsh lesson of not booking profits at 300+, made a 100%+ gain just to see it evaporate and come down to the buying price. Seems more costs are going to hit the P&L. True Profitability will remain supressed.

Not a buy or sell recommendation. Not Sebi registered. Continue to Like the industry but this investment met 4 Bs of selling:- bent, broken and beyond belief…

Rationalinvestor · March 13, 2022, 12:34am

from poor Charlie’s almanac

nirvana_laha · March 13, 2022, 6:08am

At CMP of 131 for an grant price of 86, the 71 Lakh ESOPs will have a cost of ~32 Cr over the vesting period. If I remember correctly, Sequent accounts for ~50% of the ESOP cost in Year1 i.e. 16Cr in FY23 and balance over the vesting period. If I calculated correctly, the value of ESOPs granted to last MD was around 2.5Cr/quarter and value for new MD is ~4Cr/quarter in Year 1 (FY23), so additional hit to P&L on account of appointment of new MD should be around 1.5Cr/quarter. In addition, difference in remuneration between last MD and new MD will hit the P&L.

Overall, the impact won’t be more than 1.5-2Cr/quarter. It definitely comes at a time when investors were expecting P&L recovery, so doesn’t help in that sense. But if the new MD helps the company in recovering over the next 4-8 quarters, I don’t think these additional costs will pinch. Investor focus should be on tracking business recovery and earnings recovery and questioning management if the recovery doesn’t happen as expected.

prashantrane2000 · March 13, 2022, 6:12am

As there are quite a few reactions on ESOP topic, so highlighting few things for everyone to have complete view of the situation

SeQuent Scientific Limited Employees Stock Option Plan 2020 is not new this was already mentioned in AR2021 , so this is utilization of what was already agreed with shareholder for recruiting new MD.

image1199×661 214 KB
Some of the ESOP expenses were already reveresed in Q3FY22, post resignation of previous MD

image772×528 99.6 KB

As this is frontloaded this is all accounted and already disclosed by company, I guess my post is kind of post-mortem analysis and just checking what is the real value new MD is bringing on to the table. Remember as majority shareholding is belonging to Carlyle at least I am less worried utilization of shareholders fund part. They must keen more than minority shareholders to get maximum profits and shortest span of time. This is time I am separating stock price from the business, I will let the execution be taken care by experts. (Ultimately they are getting handsomely paid ) Disc: Invested from lower levels

image1336×439 102 KB

paragbharambe · March 13, 2022, 9:57am

What date (and price) will be considered as valid price for calculating ESOP cost? As per the notification the resolution is open as

Please note that the remote e-voting period in respect of the resolution mentioned in the Postal Ballot
Notice will commence on Friday, March 11, 2022 at 9:00 A.M. (IST) and ends on Saturday, April 09, 2022 at 5:00 P.M. (IST).

If I consider 11 March 22 price (131) then the above 32 cr will be cost as you have calculated above. But will one day price is considered or they will consider average price over the period (1-3 months)? any idea?

paragbharambe · March 21, 2022, 11:45am

White Oak Capital has increased the stake to 5.01%.

navneetsinghvi · March 21, 2022, 12:22pm

Thanks for this important info. I was just checking website screener. I didn’t see white oak name there, provided they are not new entrants.
Note: if above post is in violation of any guideline, please let me know …I will delete.
Thanks

pikrohit · March 22, 2022, 9:18am

This is across all FPI/AIF/PMS/SMAs right? It is the total holding spread across various classes. They may not fall directly under disclosure compliance if held in separate granular accounts not directly in name of White Oak.

paragbharambe · March 22, 2022, 9:54am

I think that could the reason.

Also, the shareholding is declared by the company (to the exchange) on quarterly basis. So this may reflect in their quarterly shareholding report. However, as hinted above, this may show up as holding is spread across different accounts.

pradyumnacster · April 14, 2022, 3:36pm

And now the CFO resigns. The sequence of events are highly suspicious when all top management moves out.
Is this some kind of move by the PE to replace the management?