SECTOR: HEALTH CARE
Syngene International Ltd
STOCK INFO.
BSE Sensex:28,105
S&P CNX:8,521
(INR CRORES)
11 August 2015
Initiating Coverage
Buy
INR285
Y/E MARCH
Revenue
EBITDA
EBITDA Margin(%)
NP (Adj.)
EPS (Adj.)
EPS Growth (%)
BV/share
ROE (%)
ROCE (%)
P/E (x)
P/BV (x)
FY15
872
293
33.6
175
8.8
30
42.4
23
22
32.4
6.7
FY16E
1077
367
34.1
222
11.1
27
50.3
24
24
25.6
5.7
FY17E
1346
462
34.4
281
14.1
27
60.3
26
26
20.2
4.7
We recommend a BUY on Syngene International with a target
of INR 350- valuing the company at 25x FY 17E EPS
Unique CRO play:
Syngene, subsidiary of Biocon, is a contract
research organisations (CRO) with 2000+ scientists working for 16 of
the top -20 global innovators. Syngene offers integrated discovery and
development services to over 211 clients globally (103 in CY12) in
pharma, biotech, agrochemical and other industries. Long-standing
relationships with customers have been a key strength. Some of its
strategic collaborations are with Bristol - Myers Squibb, Baxter, Endo
Pharmaceuticals (pharma), and Abbott Nutrition.
Business diversification to drive value growth:
The company
has shifted from CRO to contract manufacturing (CMO) of novel
molecules. Six of its partners' molecules are in advanced stages of
clinical development (five in phase-3, one has completed phase-3). It
has signed a commercial supply pact for three of these molecules with
a large innovative player. More importantly, its partner has already
filed an NDA with the USFDA for commercial launch for one of
these three molecules a year ago.
Well positioned to leverage from growth in global pharma R&D
outsourcing trend :
Global pharmaceutical players are facing
structural issues such as profit pressures arising from impending patent
cliff, drying product pipeline and rising R&D costs. Surprisingly,
however, the new product approvals from the USFDA are on the rise.
Hence, these players are inclined to outsource some of the R&D budget
to CROs like Syngene. Outsourcing allows clients to convert a portion
of their R&D budgets from a fixed to a variable cost, giving them
greater flexibility to shift strategic and development priorities in response
to market conditions. According to Frost & Sullivan estimates, R&D
spend in the global pharma space was ~US$139 billion in 2014 whereas
the CRO pie was ~US$44 billion (32%).
Valuations & View:
We recommend buying Syngene post the listing
for a target price of INR 350 per share. We value the company at 25x
FY17E EPS at a premium to its only comparable peer in Asia. Wuxi
Pharmatech (the only comparable peer in Asia) is valued at ~20x FY17E
EPS. However, Syngene has superior financials compared to Wuxi
with FY15 margin of 33.0% (vs. Wuxi's 22.3%), ROCE of 21% (vs
10.5%) and ROE of 20.7% (vs 15.2). The novel drug CMO opportunity,
could result in earnings surprise to our estimates in FY17. Further, as
there are no other listed players in bio-pharm CRAMS space, we
believe Syngene will command a scarcity premium.
KEY FINANCIALS
Diluted Shares (cr)
Market Cap. (INRcr)
Market Cap. (US$ m)
20.0
5697
893
STOCK DATA
Major Shareholders (as of 7th Aug 2015)
Promoter
Insitution
Public & Others
74.5
18.1
7.4
Maximum Buy Price :INR300
Ravi Shenoy (ravi.shenoy@MotilalOswal.com); Tel: +91 22 30896865

Syngene International
Investment Arguments (Continued)
High recall value:
Due to its integrated service offerings coupled with consistent\ performance and high data
integrity ethos, Syngene has enjoyed high recall value, which is reflected from the fact that eight out of top 10
clients have been engaged with it for the past five years. The company has also established dedicated centre
for its three major clients Bristol-Myers Squibb Co (BMS), Abbott and Baxter. BMS has also recently extended
this engagement with Syngene to 2020.
Strong financial track record:
Syngene delivered healthy 26% and 42% revenue and earning CAGR over
last five years to Rs 8.6bn and Rs 1.75bn respectively in FY15. During these five years, the EBITDA margins
remain steady in the range of 30-33%. The return ratios remain strong with FY15 ROCE and ROE at 21% and
20.7% respectively.
Timely CAPEX to support value growth ahead:
Looking at the upcoming custom manufacturing opportunity,
Syngene has expanded its manufacturing capacity 3-4x over the last two years. Additionally, Syngene has set
an investment target of US$ 200mn over the next three years for (1) brownfield expansion in its small molecule
manufacturing facility, (2) setting up a new biologic manufacturing facility, (3) expanding its research laboratory
in Bengaluru and for a greenfield manufacturing unit in the Mangalore SEZ that would be ready in three years.
Company background:
Incorporated in 1993 as a subsidiary of Biocon, Syngene International (SIL) is a leading contract research
organisation (CRO), which supports R&D programs of global pharmaceutical companies. The company's
multi-disciplinary skills in integrated drug discovery and development include capabilities in medicinal chemistry,
biology, toxicology, custom synthesis, process R&D, cGMP manufacturing, formulation and analytical
development.
SIL offers outsourced services to support discovery and development for R&D driven organisations across
industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health and
agro-chemicals. CRO services span the range of R&D activities from new molecular entity (NME) discovery,
development and manufacturing.
The company provides significant cost advantage to companies seeking to minimise their R&D spends. The
lower cost structure in Asia Pacific region helps in reducing R&D spend by reducing unit cost of R&D output.
It manages a pool of 2122 scientists including 258 PhDs and 1665 scientists with masters degree, to ensure
timely execution of projects, cost effectiveness and quality of the projects, confidentiality and protection of
intellectual property. The company owns state-of-the-art research facilities spread over 9,00,000 sq ft, certified
by major regulatory bodies.
Investment Concerns
High sensitivity to currency movement
:
Syngene derives most of its revenues in US Dollars and incurs
few costs in US dollars, and hence it is exposed to the risks associated in foreign exchange rates which could
negatively impact its profitability.
Client consolidation:
In a growing trend of global pharma consolidation, if the priorities of the resultant entity
are changed, there can be loss of business in the existing projects. This may severely affect the business
prospects.
Dependence of few clients:
The company earns over 70% of its revenue from top 10 clients including~30%
of revenues from BMS. Hence, loss or decrease in business from, one or more of these clients may adversely
impact its financials.
11 August 2015
2

Syngene International
IVRCL: Financials and Valuation
Syngene International Financials & Valuation
INCOME STATEMENT (Consolidated)
Y/E MARCH
FY13
FY14
(INRCR)
FY15 FY16E FY17E
RATIOS (Consolidated)
Y/E MARCH
FY13
FY14
FY15 FY16E FY17E
Revenues
Growth
COGS
Employee Cost
Other Expenses
EBITDA
EBITDA Margin
Depreciation
Other Income
Interest Cost
PBT
Tax
Adjusted PAT
Growth
PAT Margin
554
32%
145
124
113
173
60
4
7
111
4
102
44%
708
27%
191
156
138
223
66
8
0
165
22
135
32%
872 1077
23% 24%
239
202
138
293
81
12
8
215
29
175
292
250
168
367
98
11
8
271
39
222
1346
25%
365
312
207
462
116
13
12
348
54
281
27%
Adjusted EPS (INR)
Book Value
Div Per Share
Dividend Payout
Net Debt / Equity
Valuation
P/E
P/BV
Dividend Yield
Return Ratios
ROCE
ROE
W.Cap. Ratios
Debtor days
Inventory days
Creditor days
W.Cap cycle
5.1
199
0.0
0%
0.0
-
-
-
22%
25%
51
30
208
(127)
6.8
253
0.0
0%
0.1
-
-
-
22%
23%
49
20
146
(76)
8.8
42
5.7
65%
0.0
32.4
6.7
2.0%
22%
23%
76
37
106
7
11.1
50
2.8
25%
0.0
25.6
5.7
1.0%
24%
24%
50
45
153
(58)
14.1
60
3.5
25%
0.0
20.2
4.7
1.2%
26%
26%
50
45
154
(59)
31.2% 31.5% 33.6% 34.1% 34.4%
30% 27%
18.4% 19.0% 20.1% 20.6% 20.9%
BALANCE SHEET (Consolidated)
Y/E MARCH
FY13
FY14
(INRCR)
FY15 FY16E FY17E
CASH FLOW
(Consolidated)
(INRCR)
FY13
FY14
FY15 FY16E FY17E
Y/E MARCH
Share Capital
Reserves
Networth
Loans
Def. Tax Liab
Other long term liability
SOURCES OF FUNDS
Net Fixed Assets
Capital WIP
Inventories
Debtors
Cash & Investments
Loans & Advances
Other Curr Assets
Current investments
Curr. Assets
Creditors and Prov.
Net Current Assets
26
493
519
0
7
50
575
381
9
18
77
12
16
46
69
237
149
88
26
633
659
155
5
64
883
394
45
15
94
92
27
54
352
634
308
327
117
883
199
646
199
803
199
1002
845 1002 1201
155 140 205
5
78
5
50
5
60
1083 1197 1470
503 710 888
105
38
180
116
34
72
146
586
339
247
105
36
146
113
28
80
146
548
285
264
105
45
183
208
35
100
146
717
356
360
PBT
Adjustments
(Inc)/Dec in W.Cap
Others
Tax Paid
CF from Operations
(Inc)/Dec in FA
Net investments
Others
CF from Investing act.
Equity issue/buy back
Inc/(Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
Others
CF from Financing act.
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
106
157 204 261 335
53
49
73
106 128
(64)
93 (139)
(8)
(1)
12
23 (90)
24
(2)
(4)
(22) (29) (39) (54)
104
300
19 344 406
(61) (100) (197) (299) (293)
(69) (283) 206
0
0
-20
9
3
0
0
(150) (374)
12 (299) (293)
120
0 133
0
0
(93)
156 (25)
20
65
(7)
(0)
(8)
(8) (12)
0
0 (114) (55) (70)
0
0
7
0
0
21
155
(7) (44) (17)
(26)
80
24
2
96
38
12
92 111 113
12
92 116 113 208
Other LT Assets
97
APPLICATION OF FUND 575
227 118 117
1083 1197 1470
11 August 2015
3

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