By Geetanjali Kedia

Syngene International is entering the primary market on Monday 27^th July 2015, with an offer for sale of 2.2 crore equity shares of Rs. 10 each, by parent Biocon Limited, in the price band of Rs. 240 to Rs. 250 per share. The issue, representing 11% of the post-issue paid up capital, will raise Rs. 528 crore to Rs. 550 crore, at the lower and upper end of the price band respectively, based on the price discovered. The issue, closing on Wednesday 29^th July, does not have any retail discount, which was to be considered earlier. 20 lakh shares, representing ~9% of the issue, are reserved for shareholders of Biocon.

Syngene International, 83.6% subsidiary of Biocon Limited (with overall promoter holding of 85.5%), provides contract research services for end-to-end discovery and development of novel molecular entities to pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies, through its team of 2,122 scientists. 9.9% stake in the company is owned by PE fund Silver Leaf Oak (acquired at Rs. 380 crore, via secondary purchase from promoter group, since Sept 2014), while 3.3% is held by the employee welfare trust, leaving balance 1.3% in the hands of private individuals / companies. 

Company has very sound fundamentals, with 4 year revenue CAGR of 28%, between FY11- FY15 and PAT CAGR of 59%. During FY15, revenue grew 23% YoY, to Rs. 860 crore, 95% of which came via exports, while EBITDA margin was healthy at 34%, leading to an EBITDA of Rs. 293 crore, up 32% YoY. Since the company enjoys many tax concessions in form of SEZ unit and additional depreciation on plant and machinery, income tax rates are very low, and stood at just 14% for FY15. Thus, net profit of Rs. 175 crore was earned in FY15, translating into net margin and EPS of 20.3% and Rs. 8.89 respectively.

On equity of Rs. 199 crore (face value of Rs. 10 each), company has net worth of Rs. 845 crore, as of 31st March 2015. While it has total debt of Rs. 155 crore, balance sheet shows current investments and cash balance of Rs. 262 crore, indicating net cash surplus of Rs. 107 crore, or Rs. 5.36 per share. Since the issue is 100% offer for sale, no proceeds will flow to the company. The PE investor is also not exiting via the issue. Promoter holing of the Biocon group will decline to 74.5%, post listing.

Biocon, in its Q1FY16 consolidated results, clocked Rs. 234 revenue for the contract research and manufacturing services, which is essentially Syngene International. Operating profit for Q1FY16 from this vertical stood at Rs. 80 crore, which reflects positive trend, as operating profit for FY15 stood at Rs. 297 crore. Thus, the company continues to post robust growth, so far, in the current fiscal too.

At upper band of Rs. 250 per share, company will have market cap of Rs. 4,978 crore. This discounts the FY15 earnings by a PE multiple of 28.4 times. Extrapolating FY15’s earnings growth rates of 30% to FY16, company is estimated to clock net profit of Rs. 228 crore for FY16, which indicates a PE multiple of 21.9 times, at upper price band. PE multiple of 22 times, based on current year earnings, is attractive for a high-growth pharma stock clocking healthy margins, with a sound balance sheet, backed by strong management team and pedigree. Since Sun Pharma Advanced Research is loss making and there are no other pure-play CRAMs players listed on Indian bourses, no listed peer is ideal for comparison.

Syngene International has proved to be very successful in turning into a bright spot in Biocon’s success – accounting for almost 45% in Biocon’s current market cap of Rs. 9.,300 crore. Only time will tell if this child has the potential to grow bigger than its parent, like what was reported for Maruti Suzuki’s market cap exceeding that of its parent Japan’s Suzuki Motors.

Leaving all speculations aside, Syngene is a fundamentally strong issue, priced reasonably. Hence, we recommend ‘subscribe’ to the issue.

Disclosure: Not applying in the IPO.