I have a question regarding the business model. I have been studying this company for a couple of days now. What attracts me to the company is:
- Pretty stable margins on EBITDA and PAT front. Off-late EBITDA margins have been contracting owing to higher headcount, but margins are still pretty much good.
- The workforce.
- Growth prospects of the CRO/ CMO industry
- Decent return ratios
All looks good prima-facie, but when I think about it from a critical point of view, these are my apprehensions:
- The company needs to be compliant with various regulations across the world. Compliance will also mean that the company has to keep investing in new technologies.
- The revenue recognition that the company does is on the basis of deliverables. When we talk about research as a business, deliverables may not always be on time. This may affect cashflows.
My question is: When a company is taking risk on behalf of their clients, does the company benefit from any intellectual property? Does all the intellectual property belong to the clients or Syngene has a share in it?
Appreciate if anybody could answer that. Thanks!
Company do not take any risk.
Their Model is Fee for Service hence intellectual rights remains with the company who sponsore the project
Hi All
Syngene Q4 concall notes -
Date: 13th May 2020
- Company ended FY 2020 with a revenue growth of 10%, clocking in INR 2,094 crores which if adjusted for one time pass through billing in FY2019, would lead to revenue growth of 13%.
- Company also grew by 13% y-o-y in Q4, with PAT up by 10% due to higher depreciation costs.
- Company’s Q4 operations were not significantly impacted by Covid related lockdown since clients accelerated work commitments before the lockdown was announced and the company was also able to successfully move to WFH.
- If the operations return to normal before the end of Q1, Syngene envisages double digit revenue growth for FY2021 with flat profitability due to higher overheads and depreciation. The higher depreciation is on account of commissioning of Mangalore API facility, which is likely to start generating revenues from Q4 of FY 2021, by which time all its approvals are expected to be in place.
- Company continues to be capex heavy as it deployed almost 108 mn USD in FY20 – USD 48 mn in Mangalore API Plant, 28 mn in Discovery, 12 in biologics and remaining 20 mn in development.
- Syngene is looking to increase its asset block to 550mn USD by FY 2021 from its current 451 mn USD. In this, the cost of API plant is USD 75 mn. (Profit – USD 58 mn, Market Cap – USD 1,820 mn)
- While not giving any information on profitability or return matrix for the API investment, company maintains that its core service business will have a 1x Asset turnover ratio.
- Company will not be making its own API or undertaking own CAR-T research to build a pipeline, but would only be undertaking manufacturing of innovator drug APIs. This not only helps Syngene increase its revenue base, but also helps it offer bundled and diversified services to its customers.
- On being asked how much of the work can be done at home as opposed to in labs requiring sophisticated equipment, company could not quantify, but said that its transition of employees to work from home has been quite seamless.
Thanks for the summary. I guess in terms of APIs. Jonathan Hunt indicated that they expect to manufacture Innovator molecules and not generics.
I tried to do a quick Valuation check , pls evaluate and let me know if this looks ok
I have assumed as per Conf call that it takes two years to fully utilize the capex. So the assumption for the table above is that the company can generate 1x Revenue only in the third year and around 50% in the second year and none in the first year
There is slight variation in 2020 Revenue (if calculated with with the above logic) but still decent for approximations. With all the capex done and 1X FA turnover the company can achieve arnd 25%, 24% and 20% growth over the next three years. The other assumption here is that company will not do further capex in 2022 and 2023
This still looks expensive to me especially in the current market. Can you pls review and let me know , what am I missing?
Disc: I am not invested in the script and the above is not a buy/sell reco
On Mangalore Facility, management stated that FY21 will be almost nil as commercial production will start only in Q4FY21. And then full utilisation in 3-5 years; so full utilisation should be expected by FY24 and not FY23.
For mangalore facility they even said as it’s api manufacturing, you can’t expect 1x FA turnover
I have assumed full utilization in 3rd year and we can always change that to 4th year but that will make the valuation even more expensive and same goes with 1x Revenue for the API plant.
So if this is obvious, why is Market giving such a high valuation to the company. So the question still remains what am I missing
I think many investors have this number of 15 PE as fairly valued anchored into their minds. This number comes in 2-3 ways. The first is long term average of the index. The second comes from average interest scenario because 1/PE is really the earnings yield that can be compared with risk free interest rate. But 15 PE is average and there are some businesses which will always trade far above this and some businesses far below this.
One can not expect to see Nestle at 15 PE as long as it keeps growing 10-15%. The businesses that trade far above 15PE have several characteristics like - leadership position of business, strong competitive advantage that it is difficult to dislodge company, high ROCE and cash flows, ability to re-invest capital at higher rate, growth fast higher than nominal GDP growth, growth visibility for several years into future, exceptional brand, exceptional distribution, non-cyclical nature of business, sustainable high margins etc.
Coming to case of Syngene, you can decide for yourself which characteristics from above, does the business have.
The company has consistently had EBITDA margins above 30%+ for several years. Please check how many companies have such kind of margins.
The company provides research and manufacturing services across the phrma life cycle - discovery/development/clinical trials/pre-discovery/manufacturing. This is high quality, value additive work. They have long standing relationship with top 10 global Pharma companies with some contracts till 2026. There is no company in India that comes close to this. The only credible global competitor is Wuxi.
Screener shows me that average PE for last 5 years has been 35. I don’t remember this company ever available at 15-20 PE barring severe market distress situations.
And you can research more about these aspects and come back to forum with your findings.
Hope this helps.
Disc - No investments
A better way to look at valuations is to ask whether the stock will re-rate, de-rate or stay the same in terms of valuations and what will be the factors for these to happen.
Looking in terms of whether valuation will re-rate or de-rate allows you to avoid going into numbers game of say 80PE is high and 10PE is low. Plus, it prevents you from arguing with what the market is showing you.
Obviously 80PE is very high to be justified by any factors and it might come around to normalized levels sometime. But this sometime can be 10-years away- who knows?
So one has to decide if they want to crib about high valuations over next 5-10 years; or want to make money.
@sukhlani1 There are only two ways of money to be made in “high quality companies with proven track record and existing in a current environment which is positive for their industry as well as positive from the market perception/weightage point of view (wherein market participants are biased towards buying rather selling such stocks)” - this is the category of stock in which Syngene falls.
These two ways are:
a) you are a momemtum guy and ride such shares with strict stop losses and you have a decent (not required to be great) sense of how the fundamentals and technicals are shaping up for the company and sector
and
b) you actually do a deep dive and are able to see the justification of the high multiples in terms of probable and unusual higher earnings or great resilience in business model and that comes basis your deep research and not some simple excel model extrapolations. Most excel model in the kind of companies with traits I described above (in which Syngene falls currently) will lead you to not buy such companies itself as there is no logical justification in buying such companies purely on the basis of historical numbers. This is why most value investors would not take the pains of deep-diving such companies and it sometimes leads them to miss many promising opportunities also. However nothing wrong in it if one does decide to leave them quickly and invest in many other things which make sense purely from a historical number perspective - one just need to be comfortable with one’s own style of investing whatever it is.
@8sarveshg - your posts are quite impactful to relate - way real life. Would you be able to help on momentum investing methods and ways to identify trends - these coupled with stop loss and quality orgs may help lots of starters to get a good jump start and preserve capital.
For e.g Syngene was on my watchlist for long ( Biocon has been in my core PF hence familiarwith group) and March gave opportunity to enter, what is not clear is that would you call Syngene a Momentum candidate( Pharma/CRAMS, Spl chem, native digital etc) in wake of Corona as prior to march fall it was still in high 30+PE most of times, and if that is the case of further tailwind and slight up rerating due to corona - what should be the signs one should look at balance momentum holdings as we go forward few qtrs - as to exit/reduce. Assume they would be external triggers ( outside company performance considering similar growth as past) e.g. when money rotates back to other sectors when economy revival signs appear? Apparently some 40L syngene shares have been bought by MFs in March and April- sizable for a low float , large promoter holding script.
Will you also categorize Biocon as whole as momentum story in current context as well( miss on Qtrly performance but mkt has held prices steady and high end on PE.
Thanks!
@Dev_S - If you would have followed me you would have noticed that I am not a momentum guy (although I do understand parts of it well) so would be unable to guide you on the same.
I track Syngene only because I have an investment in Suven for myself and my clients (from lower levels than current market price) which broadly falls under a similar segment. But from my industry primary research, I can tell you that I have heard positive things about Syngene’s business.
Noted @8sarveshg, thanks.
Good to hear Syngene quality view from you.
It would be interesting to observe trends for value chain upstream segment - higher margin segments ( Research) evolving in overall business mix.
In a different parlance India IT with outsourcing was built initially with lot of work coming in on services ( still is) , however the core engg/R&D part is also scaling now with global captive centers for FAAANG and beyond in India over last few years - though not being outsourced to IT svc giant’s.
Syngene seem to have built long relationships with key clients and appears well placed to capture it.
hi Shekhar
sorry for the delayed response. i missed your reply.
i see some great replies to your post. I think the calculations made by you are right. However, i do think your margins numbers might need a re check since i am not of an opinion that the margins for services and manufacturing business will be same. (i dont know what the mgmt commentary is here)
also, i agree with you on the valuation front. too expensive for me too.
Since essentially they try to convert fixed cost for innovators into variable cost in the process isnt syngene a perennially capex business with no sign of free cash flows ? or is my understanding naive.
They seem to have added fair bit of clientele over the years, any data on the number of client leaving them ?
True; that in their business Capex=Revenues and that it is not an asset light business.
But it is one of those very few businesses wherein they can continuously reinvest at 22-25% ROCE for very long. So the compounding effect is good here.