Dear All,
They are selling as they are exiting prompters. They have sold large chunk of their stake at Rs.86 per share to Carlyne and now they are selling rest of their holding. so no worries.
holding
thank you.
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Turkey has been added to the FATF grey list. This may result in weakening of the Turkish Lira and potential impact on trade, at least in the short term. Rating agencies could downgrade the country. Iâm not entirely sure of the consequences this may have on Sequent, but it is bound to make institutions uncomfortable. Could be one of the reasons for the price action. Request anyone with more information to please share.
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Pardon my ignorance, I didnt quite get the connection between Sequent & Turkey.
@sougataG Turkey makes for about 20% of Sequentâs business and is among the highest margin contributors with large share of injectibles
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The article says that the FII exodus from Turkey has been on since an year or soâŚit would accelerate. What is new as on today as per the article?
Also, FII investment is one thing and doing business can be another. Will exodus of FII reduce turnover & profits for Sequent in Turkey? If yes, how?
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@Investor_No_1 As I said in the post, I am not entirely sure of the consequences that Turkey getting added to FATF will have on Sequent. The article simply talks about the anecdotal impact that getting added to FATF typically has on a countryâs investment climate and currency.
We know Turkey has been added to FATF and we know that Sequent has a reasonable exposure to Turkey. Whether or not this will materially impact Sequentâs business, or us it just short term noise, is for us to figure out. I am not sure, and am hoping that someone with a better understandings of the issue can throw some light.
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if we have gone through previous concalls , we can fairly say that Turkey is always a unstable business for Sequent. That is the reason they are making lot of efforts to move the business to regulated markets (USA & Europe). Please donât forget that they recently started CDMO business and I believe zoetis is their biggest client. I personally feel, these few coming months are excellent opportunities to accumulate this one of the kind business
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https://www.bseindia.com/corporates/anndet_new.aspx?newsid=87b396e6-7464-44dd-be77-9a64c269db5c
Results are out
Sequent has been a good learning experience on expectations build up vs reality mismatch as well as risks that investors tend to ignore during momentum.
Itâs clear from results that things when slide, seldom turn around in short time, also given if a sector falls out of flavor takes time to come back in vogue- as is the case of Pharma set.
Tracking position - intend to add slowly
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Looking beyond the reported numbers and at the commentary. Seems entire industry has been suffering from destocking and RM issues (temporary or structural, one has to form their own views). Ex of Albendazole (they Debottlenecked at Mahad in FY21), Api portfolio grew by 25%+ due to due to lower offtake as WHO demand lagging (reason given: Closure of schools and no deworming programme). Topline recovery is good, gross margins contracting could be a one time issue due to RM hit that the entire industry has gone through.
Where do we go from here?
Likely data points will be to get the view on the margins to come back to normal in H2 of this year+ Management has indicated in the past call that growth will comeback from FY23 onwards. They will be growing on FY21 base and not FY22 base
A good case study in market psychology:- initial euphoria driven by Carlyle purchase has settled down. Now the business has to perform in next 2-3 years. Another positive sign was the long term contract with a global api company. If these issues are transient (Rm hit& destocking) or not. One has to take an individual call.
Disclosure:- invested since last November. Saw the entire human psychology and business narrative bit playing out as a live case study for me to learn.
Not sebi registered. Not a buy/sell
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Turkeyâs business saw good growth but the country macro also compounded the headwinds. They are trying to build an export business from there I would like to see how that plays out
Disclosure:- Invested
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I wonder if it is actually an industry-wide issue. Both Elanco and Zoetis reported good numbers last quarter (in fact, both raised their guidance), while Sequent struggled.
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Itâs an input cost pricing issue. The companies youâre mentioning are more into companion animals and do gross margins above 60%.
That being said:- Two key data points I was looking for, Margin recivery in H2 and FY23 subsequent growth. Concall was satisfactory and got the answers.
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They will be initiating cost hikes from Q3 as they enter into fixed contracts with the innovators for the APIs towards the end of financial year (Financial year followed by innovators).
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They have signed a new long term Api supply deal to a US top 10 Animal Api company, where there is only 1-2 other European suppliers.
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Api business guidance to be flat this year, given it degrew in H1 by 10%, H2 likely to see strong growth compared to first half of the year.
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Albendazole was impacted due to closure of schools in Africa.
Where do we go from here? Part 2
-Intitial euphoria has died down which is good in a way.
-If the business starts delivering again (all indications it will). They will easily do Ebitda of 250-270 crores in FY23 and grow much faster in FY23&FY24 on a subdued base.
-Long term guidance remains the same.
Key learnings personally, as always thereâs much to learn from @hitesh2710 sir, that profit booking done at peak narrative and numbers lagging is not a bad strategy. Learning from a trading/momentum mindset can actually help investors in the journey of a stock.
Disc: invested. Renforces the view, that why being humble is important in markets 
34 Likes
Few points in addition to @Worldlywiseinvestors Post
- Longer duration contract win against EU competition is not on price points, infact they are equally pricey
- WHO has started tenders to Sequent customers, demand is visible
- API flat at YoY level in FY 22, H2 better than H1
One aspect that is probably being underlooked currently in all stock price movement mayhem is Role of Carlyle in driving growth
- They havenât bought asset to run it as is, some of structural changes are visible - Commercial head hiring in EU( larger and stable growth pie)
- More Acquisition will come sooner than later, inorganic is embedded in PE strategy
- Large Partnerships being announced like Zoetis etc for India geo - behind the scenes it requires networking which Carlyle will continue to provide
- There are reasons that they are the only US approved entity in India in this space, space is growing and with Carlyle backing them up - things are bound to accelerate ( QoQ is not PE way of looking at things)
Market enthusiasm and narrative is well placed if spread out on longer duration with reasonable returns expectations, unfortunately thatâs not how market participant and psychology works. Also believe when a sector is out of favor it takes time to come back, FOMO and average down is real issue for retail in such counters.
Tracking position
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What is RM here? I am new to investing and do not know a lot of financial terminologies.
Thanks in Advance!
Rm indicates raw material 
sequent uses Api from China and Ksm+intermediates as raw material
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Thanks Ishmit. I share the same enthusiasm for the business. My key investment thesis is:
- Niche industry - just 4% of the global pharma industry, large size, consistent growth, no cyclicality, resembles branded generic, low product risk, low R&D risk, long product lifecycle unlike human pharma, and no pricing cliff risk
- Secular API shift to India - Sequent would benefit.
- Distribution is the moat - and Sequent has achieved that by buying companies in different markets. It does not directly compete with large animal pharma companies (the top 4 has ~40% global market share) but it competes in the long tail of smaller products that have inefficient competition and where generic competition was not present at all. Thatâs the reason (along with acquisitions), why Sequent has been able to grow above the industry growth in some of the European markets.
- What most people are missing is that the size of the business is still sub-scale - Sequent has entered into multiple geographies and the size of the business is in those geographies is still small. Once you achieve a certain size, incremental margins are huge (revenue-COGS-sales incentive fees directly flow to EBITDA). Look at the Turkey business where they are the third largest and margin profile is superior to all the other players. Look at the Indian players who have some sizable scale and the margin profile is closer to 18-20%. So one can argue that over the next 3-5 years, as the business scale, margin profile could be in the range of 18-20%.
- Aligned management team - has ~7% ESOP pool (quite large compared to their current compensation), Carlyle is expected to use this as a platform to acquire other companies and possibly help company to enter into the US and China markets (optionality)
So, if you believe that the business can grow by 15% (both organic and inorganic) and achieve 18-20% margin profile (top API companies make 25-30%, global animal health companies make EBITDA margins of 20-22%, and Indian companies are also in the range of 18-20%) then IRR on this stock could be in the range of 17-20%.
Risks
- USFDA risk - like any pharma company, if the Vizag plant gets any warning letter - API margins would suffer substantially.
- Customer concentration risk - in the API business, the top 10 now have 55-60% revenue share. Any slowdown with the eventual customer could slow down the growth of the business. Example of what we are seeing from the WHO contract.
- Inflation - clearly the company does not have significant pricing power (in fact, the entire industry does not enjoy significant pricing power because production animals have a finite economic value and the end customers would not be willing to spend huge sums of money unlike human health) and therefore, any significant cost pressure could result in erosion in the margin profile.
Also, I think that most people missed that the business was over-earning in FY21 because of COVID. Its a sales and marketing heavy business - sales team needs to travel to generate demand and because of COVID it could not travel and that was the entire saving flowing to EBITDA. I estimate that such savings were as high as 200bps and therefore true EBITDA margins in FY21 would have been 13-14% instead of 16% what we saw.
In light of all the above, cost inflation, and slowed demand has eroded ~4% of EBITDA margins (16% reported in FY21 minus 2% over earning due to sales and marketing savings - 10% reported post ESOP adjustment).
Where do we go from here
- Q3 is expected to be muted as per the management.
- FY23 could be back to 13-14% and from there on one can assume 150-200bps improvement every year.
Questions still unanswered:
- Why is only Sequent facing cost pressure and why other companies are not - Agree with @Worldlywiseinvestors that Zoetis etc. are companion animals but they also get APIs from China, they also use oil in their production process, they also have a logistics cost element - and they also donât have the unlimited pricing power to pass on everything to end customers. Is there something more to this cost pressure argument which we donât know? Maybe! I donât know.
Disclosure - not invested, but tracking and doing more work!
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Apologies for some more notes on this. Did a bit more reading and I stand correct that Both Elanco and Zoetis have also reported significant pressure in the supply chain in Q2CY including inflation in employees cost, logistics cost, and manufacturing cost. Due to the nature of its business in favor of companion animals, they could take some price hikes (~2%) but did not fully pass on the inflationary cost. @Worldlywiseinvestors had already mentioned this in his post. Both Elanco and Zoetis will report Q3CY results today/tomorrow which should give us more sense of the supply chain pressures.
Also, some notes from Animal Health Conference attended by someone in my connection
- Shorter drug development phase in animal health (3-7 years vs 9-13y for human health), but smaller average sales (top 20 $150m in AH vs $7B in HH); and the lack of patent cliff in AH, with price erosion of 20% vs 90% in human health, and high durability, because US vets are incentivized to sell branded products (would be interesting to see how generics make a dent in the US which is the strategy for Sequent. So far Generic penetration in the US is only 10% due to (1) there is no info on product level sales and therefore difficult for generic manufacturers to assess which product to launch, (2) expensive DMA filings (US$450K for each filing), (3) consolidated distribution as well as the technical service support offered by brands to push branded sales).
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its due to the reason called our by management that they can negotiate prices of API only once a year , so sellerâs disadvantage is buyers advantage hence Zoetis hasnt faced the issue ( my guess )
COVID time was an exceptional year for the customers - both in animal and human health. Considering these are very efficient customers who would want an assured supply chain - would there be potential that the big customers increased inventory levels and kept them high during this period - to ensure that they could always keep producing despite an uncertain external environment? This could have then led to elevated demand levels in the previous year for APIs (not only Sequent, but others like Laurus as well, I am not tracking numbers for NGL).
In that case, this would potentially not be a temporary destocking phenomenon but probably some destocking + mainly due to demand normalisation? And would 2019 sales be a reasonable sales base for the future as well, versus the higher levels in 20-21?
I do not track Sequent in depth, but this is my thought on the situation in the API industry so might be flawed by how generic it is.
Discl : Not invested