Thanks. I have read the concall and I understand what the management is saying. What is not clear is howit works . Let us say these are forward contracts maturing after three years and the exchange rate today is Rs.75/US Dollar. Over the next three years, you can have:
Scenario A) The exchange rate moves to Rs.85/USD OR
Scenario B) The exchange rate moves to Rs.65/USD.
How will the accounting happen in both these (opposite) scenarios such that it will have the same zero effect? If someone can demonstrate that with an example, it will be helpful. I am trying to understand the mechanics of it.
In fact, in the concall all that the management said is that they hedge all their revenues, nowhere have they said these Rs.239 crores will be eventually reversed. They would have said so if that had been the case since a specific question was asked.
Let me try this. As per the accounting standards, if the Company is able to prove that a particular hedge is an effective cash flow hedge then MTM adjustments of those will not impact the PnL.
For example, a company takes an ECB loan and $/Re is Rs 75, when it is drawn and converted to rupees. Simultaneously they execute a hedge to buy dollars forward on the repayment date at the same rate – Rs 75.
Now subsequently rupee moves to Rs 70, the hedge will have a negative MTM but it will not be passed through PnL. Similarly, $/Re could in interim move to Rs 80 and the hedge could have a positive MTM. All these MTMs will be treated outside the PnL the way Syngene has done.
On the actual repayment date, Syngene will buy dollars from the market and pay for the ECB. The hedge will get net settled on difference between the rate recorded in books on the last reporting date and the actual market rate. The net effect cumulatively being that Syngene pays the ECB at Rs 75 and all the hedge entries cancel out each other.
ECB drawn at $1 = Rs 75
Now market moves to Rs 80 on next quarter end, hedge gain recorded Rs 5 at quarter end
Now we reach the actual repayment date,
ECB gets repaid at Market rate say Rs 85
Hedge gain / loss = Market rate Rs 85 – Rate recorded at previous quarter end i.e. Rs 80 = Rs 5
Total hedge gain recorded Rs 10
Loss on ECB repayment = Rs 75 drawdown rate – Rs 85 repayment rate = -Rs 10
Both entries squared off outside the PnL.
I strongly disagree with your assessment, Syngene topline has almost doubled in the past 4 years from 1100 cr. in FY16 to around 2000 cr. in FY20 i.e. sales growth has in the 15-20% range. And this is high quality growth because CFO has more than doubled from 308 cr. in FY16 to 677 cr. in FY20. They have used the CFO along with some debt for greenfield expansion.
Syngene management has been very clear in their communication that there won’t be profit growth in FY21 because of new facility commissioning i.e. higher depreciation will kick in. If you look at their long term track record, their EBITDA margins have been in 30-33% over the last decade, which shows the resilience of the business model. Plus India has only 1 CDMO player who is fully integrated i.e. they can do research + make APIs + make final dosage. Its like an IT company with revenue visibility, no issues in cash collection, and remarkably stable margins. Now, I agree that a lot of future growth is captured in the price but this maybe because there are not a lot of companies around with this kind of a profile. You might want to see the kind of valuations that global CRMO players (Lonza, Catalent) command.
About biocon, have you seen growth in their biologics business? With 2 biosimilars in US market, their topline has grown from 530 cr. in FY16 to 1950 cr. in FY20 (for their biologics division). And they have got about 6 more biosimilars in their pipeline (which are known to investors), plus they have started developing biosimilars whose patent will expire after 2025. This is called long term thinking, this is not a business where we should judge management on every quarter. And all this without a single equity dilution over the last decade i.e. their business generates enough cash to sustain their R&D pipeline.
Sorry for the long post, we should try to discuss more on lines of competitive advantages of Syngene vs companies like Lonza, Catalent, etc.
Disclosure: Not invested in Syngene, Invested in biocon (latest position size here)
What’s your take on the view that biosimilars will not have as much free run as generics because the price differential between them and the branded formulations will not be as high as is seen in case of synthetic medicines. So the success Indian pharma companies have achieved in the past in chemistry will be difficult to replicate in biologics.
(Disc.: Have a tracking position, trying to understand the business)
As per Q1 FY21 presentation , 5 years CAGR are as follows.
EBITDA : 16%
PAT : 11%
Normally for growing companies, CAGR of PAT remains significantly higher than CAGR of Revenue, but here it is otherwise .
Any insight into this is welcome.
Syngene is currently in aggressive expansion phase. It has increased its gross block by 3.22x in past 5 years.
However their sales have grown by 2.34x during the same period
They are yet to sweat the newly created assets especially in the past couple of years
PAT 5 years CAGR looks low as compared to Revenue and EBITDA CAGR over the same period because of higher depreciation due to above reasons and increase in tax rate from 14% to 20% due to phase off of certain SEZ tax benefits