Syngene International IPO scan by VS Fernando

Peer comparison justifies price-band though Biocon’s post-IPO trail advise caution on Syngene International IPO, says VS Fernando, IPO analyst.

IPO Object

The objects of the IPO are to achieve the benefits of listing on the stock exchanges and facilitate the sale of shares by the promoter-company. Further, the company expects that the listing will enhance its visibility and brand image among its existing as well as potential clients and provide liquidity to the existing shareholders. As the company will not receive any proceeds, the issue expenses are to be borne by the selling shareholder.

Lineage

The Bengaluru-registered Syngene International Ltd was originally floated by Kiran Mazumdar Shaw, a promoter of Biocon, in November 1993. Almost 9 years later, in March 2002, 99.9 per cent of the equity of Syngene was transferred to Biocon and as a result, the company became the subsidiary of Biocon. Currently, whereas Biocon holds 83.6% of the Rs 200 cr equity, Biocon Ltd Employee Wefare Trust and Biocon Research Ltd hold 1% and 0.9% respectively. Of the balance 14.5% classified as public holding, Silver Leaf Oak (Mauritius) Ltd is holding 9.9% and 3.3% is held by Syngene Employee Welfare Trust.

Biocon was established in 1978 to form a joint venture with Biocon Biochemicals Ltd, a company based in Ireland, to manufacture and export certain enzymes for the brewing industry. Unilever eventually acquired the joint venture partner. The joint venture terminated in 1999 when the Indian promoters exercised their right of first refusal to purchase Unilever’s 23.1% interest in Biocon, after Unilever agreed to sell its speciality chemicals business, including its interest in Biocon, to Imperial Chemical Industries (ICI).

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Over the past 35 years, Biocon has emerged as an integrated biotechnology enterprise with presence in biopharmaceuticals, enzymes, custom research and clinical research. It is reportedly the country’s largest biotechnology company in terms of revenue in the listed domain. For FY15 Biocon posted consolidated revenue of over Rs 3000 cr and its bottom line was close to Rs 500 cr. The company’s consolidated net fixed assets are worth more than Rs 3300 cr. Its accumulated free reserves amounted to Rs 3171 cr against a capital base of Rs 100 cr.

Biocon went public in March 2004 at a price of Rs 315 (paid-up Rs 5) and the shares are listed on the BSE and the NSE, commanding a market-cap of over Rs 9200 cr. Besides paying regular dividends, Biocon has also rewarded a 1:1 bonus issue in 2008. In eleven years, investors in Biocon’s IPO have got an annual return of about 20%.

Business profile 

Syngene is one of the leading contract research organizations in the country offering a suite of integrated, end-to-end discovery and development services for novel molecular entities across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. The company offers services through flexible business models that are customised to client’s requirements. These range from a full-time equivalent to a fee-for-service model, or a combination thereof.

During fiscal 2015, Syngene reportedly serviced 221 clients, ranging from multinational corporations to start-ups, including eight of the top 10 global pharmaceutical companies by sales for 2014. The company claims to have several long-term relationships and multi-year contracts with its clients, including three long-duration multi-disciplinary partnerships, each with a dedicated research centre, with three of the world’s leading global healthcare organisations viz. Bristol-Myers Squibb Co., Abbott Laboratories (Singapore) and Baxter International. Besides the giants including Merck & Co, Syngene reportedly has longstanding relationships with emerging small to mid-sized companies such as Achillion Pharmaceuticals, Inc., Aquinox Pharmaceuticals, Inc. and Saniona AB.

Syngene delivers its services through a combination of scientific talent, globally accredited systems and R&D infrastructure. At the end of FY15, its tangible fixed assets (gross block) were Rs 931 cr. the company’s laboratory and manufacturing facilities located in Bengaluru are spread over more than 9 lakh sq. ft.  As of May 31, 2015, the company had 2,122 scientists, including 258 Ph.Ds. and 1,665 scientists with a Master’s degree.

Financial Performance

In the last five years, Syngene has shown consistent growth. From Rs 322 cr in FY11, the company’s operating revenue has steadily grown up to Rs 860 cr in FY15. Operating profit has increased from Rs 100 cr in FY11 to Rs 293 cr in this period. Operating margin has been consistently above 30%. In fact, OPM has improved from 30.8% in 2011 to 32.7% in 2015. Net Profit has increased more than 6 folds, from Rs 27 cr to Rs 175 cr in four years. The company’s operations have resulted in positive cash flows in last five years, though the quantum in FY15 is significantly lower than the previous four years.

In fiscal 2015, Syngene derived 63.9% of its revenue from sale of services from long-term contracts with dedicated infrastructure and 36.1% from other contracts. Also in FY15, it derived 95.1% of revenue from sale of services to customers outside India and 4.9% from local customers.

As regards distribution, the two-decade old Syngene has so far paid just one dividend. In September 2014, the company came out with a bumper interim dividend of Rs 21 on Rs 5 paid-up share but did not pay any final dividend. Will it repeat the 420% dividend post-issue? It seems the one-off special interim was solely to benefit the promoter company. After paying the unprecedented interim dividend, the company’s capital has increased seven-folds though a bonus. As such, to maintain the dividend, the company has to pay at least 60% on the enlarged capital.

Syngene’s equity capital, which was less than Rs 3 cr in 2011, was disproportionately enlarged to Rs 200 cr through two bonuses in last three years. In February 2012, the company issued 73 bonus shares for every 10 shares held thereby enlarging the equity to Rs 24 cr. In March 2015, it rewarded another 61 shares for every 10 shares held which expanded the equity base to over Rs 199 cr.  

Of late it has become a fashion for issuers to boast in the offer document that there is no comparable peer in the listed domain to gauge the `Industry P/E Ratio’. Syngene too is no exception. The company presents itself as a contract research organization (CRO) and boasts that there are no listed entities similar to its line of business. However, the fact is, Sun Pharma Advance Research (SPAR), which is a listed entity, is also engaged in contract research. Whereas Syngene is catering to mainly outsiders, global pharma majors, SPAR is largely undertaking research for its group entities based overseas.

There are at least three other major players in the listed domain who are engaged in phama contract research and manufacturing services (CRAMS). A comparison with these CROs and CRAMS gives a feeling that Syngene’s offer is cheaper than SPAR, Divi’s and Suven Life. Nonetheless, compared to its parent company Biocon, Syngene’s valuation seems to be on the higher side.

Moreover, while bidding for Syngene, one should also keep in mind Biocon’s price behaviour in the initial years of listing. Biocon, offered at Rs 315, in March 2004 opened at Rs 400 on listing and within four trading-days the price flared to 739. However, by June 2006 the price dropped below the offer price. In the run up to the 2008 bonus issue  the price scaled up to Rs 663 but, after the one for one bonus, the price plummeted to less than Rs 90 inflicting a loss of 45% even after adjusting to the bonus. Overall, at the current price, taking into account all the dividend that Biocon has distributed in last eleven years, return to Biocon’s IPO investors works out to only a modest 19.7% per annum.

Will Syngene maintain its present high growth tempo in the coming years and give better return than the parent? Well, while Syngene’s track record exudes optimism, one cannot completely overlook the fact that another research company of the group, Biocon Research Ltd (BRL), registered in 2008, failed to put up a decent performance. Though has turned corner in FY15, BRL’s accumulated deficit amount to over Rs 200 cr!

Another factor that could mar Syngene’s share price prospects is the tax disputes. The company has received ten IT notices between 2008 and 2015 which are under appeal. Should the verdict go against the company, it will have to shell out more than Rs 100 cr.

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