Syngene’s INR550 crore IPO – What you need to know

July 20, 2015

Biotech major Biocon’s research subsidiary Syngene International is coming with its initial public offering (IPO). The public offering is ninth IPO in India this year and will see the parent’s direct equity stake of 83.6% being diluted to 72.6%. Bangalore-based Syngene offers integrated drug discovery and development services with capabilities in medicinal chemistry, biology, in vivo pharmacology and toxicology. The contract research organization (CRO) provides discovery and development services for novel molecular entities. Its services include discovery chemistry, discovery biology, safety assessment, large molecule development, chemical development, formulation development stability, polymer research, integrated discover and development, and clinical development services. The company has 2,122 scientists including 258 PhD and 1,665 scientists with a Master’s degree at the latest count on 31 May 2015.

IPO dates	27 July – 29 July
Price band	INR240 – 250 per share
Total shares	2.2 crore shares (net offer of 2 crore shares excluding the reservation of 20 lakh shares for existing Biocon shareholders
Category allocation	QIB – 50%, NII – 15%, Retail – 35%
Lead managers	Axis Capital Limited, Credit Suisse Securities (India) Private Limited and Jefferies India Private Limited

We scanned the prospectus and came to know about the risk Syngene faces from special interest groups like animal protection groups. While this is on lighter side, here are some key factors in deciding if the issue deserves your money or not.

Financial performance

Syngene has been packing in robust performances in recent years and consistent growth in topline and bottomline in the last five years prove this. It is worth highlighting that the company’s net profit margin has increased from 8% in fiscal 2011 to 20% in fiscal 2015.

Syngene’s consolidated financial performance (figures in INR crore)
	FY 2010/11	FY 2011/12	FY 2012/13	FY 2013/14	FY 2014/15
Total revenues	322.9	418.2	554.2	707.7	871.6
Expenses	295.4	344.5	447.9	551.1	668.1
Profit after tax	27.2	71.0	102.1	134.8	175.0

Source: Syngene’s Red herring prospectus

Without doubt, the parenthood of Biocon has helped Syngene in achieving these numbers. The robustness is not limited to profit and loss account and the balance sheet is also pretty robust with long term borrowing of only INR18.6 crore as on 31 March 2015. This translates into a more-than comfortable debt/equity ratio of 0.18.

Offer for sale (OFS) issue, no fresh shares

This is worth highlighting that the IPO does not include issue of fresh shares and all the shares will be sold by Biocon through the OFS route. While we are generally wary of OFS issues, Syngene is an exception here as private equity investor IVF (India Value Fund) Trustee Company is not selling its shares. IVF bought 10% stake in Syngene in January this year at the effective rate of INR190 per share. IVF’s non participation in Syngene IPO, despite having made at least 26.3% in less than a year gives us the confidence that IVF expects better valuations going ahead.

Number of clients is increasing

For fiscal 2013, 2014 and 2015, Syngene’s total number of clients increased consistently and stood at 152, 165 and 221 clients, respectively. This is a great indicator that more clients are trusting Syngene with their drug discovery program.

But not necessarily leading to risk diversification

However, addition of new clients is not necessarily leading to risk diversification as the company’s reliance on its biggest clients continues to remain high. Syngene’s top-10 clients accounted for 71.2%, 69.4% and 70.9% of its total revenue in fiscal 2013, 2014 and 2015, respectively. As one can imagine, the new clients the company has added in recent years are not coming with deep pockets. Abbott Laboratories and Baxter International are other big clients of Syngene.

Since we are talking about risk diversification, it is important to highlight that Bristol-Myers Squibb is Syngene’s biggest client and accounted for 30.1% of its services revenues in fiscal 2015. Comparable figure for fiscal 2014 and 2013 were 33.6% and 37.8% respectively. Even though Syngene’s dependence on Bristol-Myers Squibb is reducing, it is still quite high.

Exposed to exchange rate volatility

Syngene is highly vulnerable to foreign exchange rate fluctuations. In the latest fiscal year ended 31 March 2015, the company derived 95.1% of its revenues from customers outside India. Comparable figures for fiscal 2014 and 2013 were 97.2% and 95.7%, respectively. Clearly, this is on the higher side but it is no rocket science that this dependence is largely fine. “We expect the high contribution of exports to our sales mix to continue,” the company said in its prospectus. The Indian rupee’s movement against US dollar and Euro in recent years has been an open secret.

Conclusion

If you have read so far, chances are that you have already made up your mind to invest in the issue. Although Syngene will not get any funds from this issue, investors can use this opportunity to get a slice of the fast growing business. Biocon CEO Kiran Mazumdar Shaw’s grand vision for Syngene is to transform the subsidiary from a CRO to a Contract Research and Manufacturing Services (CRAMS) organization with commercial-scale manufacturing capabilities. However, we wouldn’t read too much into these transformative plans as almost every CEO has plans to make his/her organization the dominant player in the respective areas. On ground, Syngene had earnings per share (EPS) of INR9.2 per share. This means the issue is priced in the range of 26 – 27.2 times its historic EPS. This is not inexpensive but growing risk appetite in the markets has seen steeper valuations, Manpasand Beverages being a case in point.