Articulated detailed analysis on Syngene International. Thought of sharing if one finds its value addition.
Views are welcomed.
Surprised to see Syngene skip dividend under the guise of conserving cash. Dividend payout was just Rs.24 crore last two years, could have easily managed that this year too without much of strain.
Although, it’s a general perception that consistent dividend payout gives a good track record, from a promoter point of view, the capital must be deployed to in such a way to get the maximum output.
If a company is in high growth phase and need capex and has cash which can be easily deployed to give good ROIC, it’s better to employ that cash in capex rather than to just give dividend to maintain a good track record.
Also, in this time of uncertainty, when no one knows how long this will continue and how much impact it will have on cashflow, it’s prudent to save every penny.
If you go through the AR of Syngene, they have mentioned that if Covid prolongs for long, research/money can get diverted from normal business to Covid specific. So, no harm in conserving cash.
Also, few very good companies, which has the option of reinvest its entire capital, for eg. Dmart, they never give dividends
Again attaching the pdf for those who were finding difficult to download Syngene International Ltd - Tycoon Mindset Cover.pdf (1.7 MB)
Please check the pdf…
Also attaching the website link: https://drive.google.com/file/d/1iQHOKPcc5zoeRgh7Rgw85W3yjADnzh_g/view?usp=sharing#new_tab
My notes from AR 2020:
Key business updates:
• Integrated research, development and manufacturing organization providing scientific services from early discovery to commercial supply for pharma, biotech, nutrition, animal health, consumer goods and specialty chemical companies
• Company provides discovery services, development services, manufacturing services and dedicated R&D centers for clients
• Laboratories in Bangalore and Hyderabad and manufacturing in Bangalore and Mangalore
• More than 360 active clients
• 8 collaborations with top 10 pharma companies
• Rs 2094 crore revenue and Rs 366 crore PAT
• More than 4200 scientists with 400+ patents held with clients with 5000+ employee base
• Rs 3154 crore capex investment done
• 1.9 million square feet of R&D and manufacturing infrastructure
• Trend of external partnerships to drive innovation and R&D using single service provider. Helps to transform fixed cost of R&D operations into variable cost and helps small scale startups to avoid huge capex
Business Segment:
Discovery Services:
• Conducts early stage research, from target identification to delivery of drug candidate for further development
• 32% of revenue
• Engagement model is based on FTE
• Have built capabilities in CAR-T therapy
• Have also developed and validated a human papilloma virus assay, a test system increasingly being used for cervical cancer screening
Development Services:
• Pre-clinical to clinical trials including drug substance development, drug product development and associated services to demonstrate safety, tolerability and efficacy of selected drug candidate
• Fee for service-based engagement model
Manufacturing Services:
• Manufacturing services for small and large molecules including Cgmp compliant facilities, for clinical supplies and registration batches as well as commercial volumes through a new state of the art API manufacturing plant and a disposable biologics manufacturing facility
• Customized engagement model to deliver clinical and commercial supplies
Dedicated R&D:
• Dedicated multi-disciplinary scientific teams, support personnel and ring-fenced infrastructure as per client specification to support client’s R&D requirement
• Long term partnership, usually 5 years or more based on FTE model
Financial Performance:
• 10% revenue growth at Rs 2094 crore and 14% EBITDA growth and 10% PAT growth
• 17.5% PAT margin and 33% EBITDA margin
• One-time pass-through billing adjusted revenue growth YoY was 13%
• Employee cost has increased due to strengthening of leadership and mid-level management teams
• Client base increased from 331 to 360, 25% of these customers are 5+ years old
• 76% revenue from USA, 12% from Europe, 5% from Japan,4% from India and 3% from rest of the world
• 32% revenue from discovery services, 31% revenue from dedicated R&D and rest of revenue from development services and manufacturing services
• 40% of capex was in API, 26% in discovery services and 23% in R&D services. All capex was self-funded
• Total debt is down from Rs 797 crore to Rs 686 crore despite of major capex plan execution, long term debt is cleared
• PPE up from Rs 1322 crore to Rs 1877 crore
• Rs 1100 crore approximate cash on books
• Almost Rs 100 crore of repair and maintenance cost
Annual Review of Management:
• Made 4 key appointments to leadership team
• Mangalore APi facility is ready and undergoing qualification testing
• Several FFS based collaborations converted into FTE based models
• Installed 47 SQDECC dashboards
• Set up time for experiments reduced from 30 minutes to 10 minutes
• 10% improvement in lab productivity
• 2nd phase of QMS and DMS were launched
• LMIS is another project taken
• FDA21 CFR Part 11 compliance received
• University tie-up for PhD program for employees
Market Trends:
• Global contract research outsourcing (CRO) market is expected to grow at 7.6% from 2019-25 and reach $61 Billion by 2025.
• 54% of above is shared by pharma and bio-pharma companies and rest by medical devices, consumer products, cosmetics, chemical etc
• Out of $61 Billion, 12% id drug discovery, 12% is pre-clinical and 76% is clinical expected to grow at 7.4%, 8.3% and 6.7% CAGR respectively
• By segment, oncology is highest contributor to CRO and expected to grow at 7.5% CAGR
• A full service CMO makes manufacturing seamless and reduces client dependence on multiple contract providers
• CMO contract in 2018 was $21.4 billion representing YoY growth of 6.4%
• In 2018, only 2 of top 10 selling drugs were small molecules and biologics drove 80% of sales. Looking ahead, as biologics lose their patent protection, biosimilars are taking their place. The complexity of biologics, both in development and manufacturing stages, and the specialized skills and equipment required to do that, has led CROs and CMOs become an integral part of the biologics industry. Global bio-pharma CRO and CMO market size is expected to reach $37.8 billion by 2025 at 7.7% CAGR
Guidance:
• Company has opportunity to garner greater share of global contract research business
• This year will not be normal and will exercise prudence in spending and investment even though no fund-based challenges
• Expected to see some impact of covid and Q1 will show partial impact of shutdown
Other Points:
• MD and Chairman role has been separated for better corporate governance
• Not to declare any dividend considering current year situation
• Enjoys 100% exemption in income tax for 1st 5 years of operations, 50% for next 5 years and further 50% for next 5 years subjected to fulfillment of criteria
• Board looks very professional with mix of industry and academic experience
• Employee median remuneration is Rs 7 L+ with 14% increase in median salary
• 40% jump in CEO remuneration though salary within ceiling range
• 71% shares held by promoter and 21% held by FII and MFs. FII reduced by 3% and MFs increased by 3% in absolute change terms. Retail holding YoY down by 10% in growth terms on holding %
• Mirae increased its holding from 0.75% to 2.41%. MIT,Cams, Kotak, Vantage etc. are other institutional investors
Risks and Open Questions:
• 96% of revenues are in foreign currency. Hedge 100% of exposure for next 12 months and 50-70% of position over further 12 months. Long term fixed price contracts are 100% hedged
• 20% increase in receivables and 20% jump in employee cost
• Rs 71 crore of exceptional item in cashflow
• Rs 12 crore of current investment is in one of Nippon India fund
• Rs 72 crore of unquoted ICDs with financial institutions, which institution is this?
• Short term loans are in the form of ECBs
Disc: I have posted AR notes of multiple companies. I may have transacted in some of these companies in last few weeks. Kindly do your own due diligence.
Good notes. Thank you @suru27.
One point I would like to call out – Company lost Rs.2,388 million in Cash Flow Hedges, which has been directly routed through Balance Sheet (OCI):
At the moment, I am not clear how exactly this works, I read the accounting policy etc. but the exact mechanics is still not clear.
My main question is - will this be eventually reversed, and if so, under what conditions? If those conditions do not materialise, will this eventually hit the P&L (… will be subsequently reclassified to profit or loss") ? If you or someone else is aware of this, please help explain with an example! Thank you.
The way it works is,
Syngene has a very comprehensive Hedging policy, they take hedge for all net flows. So, whenever a cashflow is settled, there is a difference the between the actual cashflow vs value recorded in the books of account. But since the company has also hedged at the time of recording in the books of accounts, there would be gain/loss in the hedge as well, which would negate the difference. So amount which is being shown under OCI is the change in the value of Hedge contract.
So net net Syngene’s cashflows are at the Hedged Rate. Overtime, all these will have zero effect.
Suggest you to read Q4FY20 concall, there was some discussion on hedging- that might help.
Thanks. I have read the concall and I understand what the management is saying. What is not clear is how it 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.
Illustration:
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.
Syngene’s Corporate Video and Tour of New API Facility-
https://www.youtube.com/watch?v=6fmm1EuTLew
Revenue from operation down 31% QoQ, 0% growth YoY for company with PE of near 50 That shows very poor execution.
They just going Biocon way which has poor track record of 10Yr Profit CAGR of just 8% .
Even before COVID last 3 yr profit cagr was just 8% before that data is irrelevant as Syngene listed in 2015 .
Now this stock has lot of promise , great client , has invested timely in infra but it needs to execute the promise … Hope to see the same in coming quarters / years
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)
Kiran Shaw announced during Biocon concall that Syngene has got into contract with Gilead for manufacturing Remdesevir for India and 127 other countries. Is this the reason for the jump today?
It is an old news. You can find the same in Syngene’s Q1FY21 press release as well.
As per Q1 FY21 presentation , 5 years CAGR are as follows.
Revenue: 17%
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
Discl. - Invested
Very good detail analysis on syngene