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Syngene IPO: A Very Dull Analysis

Syngene has an IPO coming up, here’s the detail:

  • Offer: 2.2 crore shares
  • Price: Rs. 240 to Rs. 250
  • Size: Around Rs. 500 cr.
  • From: 27th July to 29th July 2015
  • Lot: 60 shares (Rs. 15,000 approximately)

We make a very cursory analysis of the IPO, as we have realised in recent times, (paraphrasing Samir Arora):

If the IPO is bad you don’t want any shares. If it’s good, you wont’ get any shares (allocated).

So detailed analysis are largely useless and it’s better to consider buying after the company lists, usually. So this is going to be abrupt and boring.

Who gets the money?

Not Syngene. They don’t get a paisa from the IPO.

All the money goes to Biocon, the promoter of Syngene. This is bad for Syngene – typically it would have taken money from an IPO and expanded operations. But because it is a cash generating company it probably doesn’t want the dilution, and eventually they can dilute away through QIPs etc. The problem is that if the company gets no money you have to value it primarily on past performance, and that performance is just about okay for a company with this kind of profit growth.

The Company

They offer Contract Research Services to companies for drug development. This is a complex field and involves a combination of hardcore research, crazy levels of testing (animal and human) and massive regulation.

Syngene’s top 3 customers cover about 45% of revenues. This includes the big Bristol-Myers-Squibb, and is followed by Abbott and Baxter. The concentration risk is huge, but then that’s true of any upcoming services company.

They have 2,100 scientists and their facilities are in Bangalore. They are negotiating with the authorities to set up a new facility in Mangalore too.

Financials

  • Syngene made Rs. 872 cr. in revenue in FY 2015, with about 175 cr. in net profit. That is a healthy profit margin of 20%.
  • Profits have grown by 30%, 32% and 43% in the last three years, growing to 2.5x of what they made in Fy 2012. This is also very good.
  • EPS has grown from Rs. 7 to Rs. 8.9, a 27% growth.
  • Given there is no dilution, the IPO values the company at a P/E of 28.
  • They don’t have too much debt, if you net out their cash – Just Rs. 50 cr. or so.
  • They are largely exporters so any fall in the rupee benefits them, as it has in the last two years.
  • Their competitors – the largest in the space, Quintiles and Covance have P/E ratios of 27 and 32. Which puts Syngene approximately fairly valued.
  • The return on equity is about 20% (175 cr. on equity of 845 cr.) which is fairly good.

What Happened to GVK Biosciences: The Big Fat Risk and Opportunity

Another large Contract Research Organization, GVK Biosciences, has been accused of manipulating clinical trial information and due to this, over 700 drugs have been banned in the EU.

This can have repurcussions on Syngene in two ways:

  • Syngene could buy out GVK Bio’s clinical trial’s business (it’s up for sale) or benefit if customers move their trial business to Syngene.
  • Syngene might get hurt because customers shy away from trials by Indian companies per se. (Another CRO, Quest Life Sciences was dinged for defective trials recently, by WHO)

Another big move is the move to Manufacturing. So once the drug is approved, Syngene can actually manufacture the drug and deliver it for customers. This business is only proposed at the moment.

Our View

Since you’re still reading, I assume you either scrolled to the end (caught you!) or actually read through the above (well done there).

This IPO is so-so. It’s ordinary in the sense that I don’t see it as a huge opportunity, but it’s probably a player that will make inroads into a fairly large market worldwide if it were to grow as well as it has. Over the next 10 years, it could become a big force, but in that context I see a lot of others that are already doing so. The pharma space is chock-a-block with fast growing players, from Ajanta to Aurobindo to Strides to even Sun Pharma.

The risks of course remain that companies abroad refuse to allow Indian companies to conduct trials or to recognize their results, or to create barriers to entry for such organizations.

At this point, though there are limited opportunities for growth and a 28 P/E may not leave much on the table for an investor. It may be better to invest in the parent company, Biocon, instead. (Hey, they get all the cash!)

A better opportunity might be to buy this stock after it lists, if it gives us more colour on Q1 results. Note however, that I’ve been horribly wrong on IPOs before and therefore the best thing to do is to analyse the information on your own before making your decision. But I have to say that – who in their right mind would say “blindly follow me, boss, I am just right”.

The main verdict, which is primarily opinion and not, as you will note, a solicitation to buy or not to buy a security: I am not buying. But it’s not a bad company; I just think there are other, better opportunities out there right now, and I’ll reconsider this position after the listing.

Disclosure: No positions in parent company (Me, family). No compensation of any kind between company or parent and me or my company.