Eris Lifesciences (IPO) is Strong on B2D

  • Date 15th June; IPO Open 16-20th June at Rs. 600-603
  • Valuations: P/E 34.3 times TTM, P/B 15.4 times
  • Mid Cap: Rs. 8,300 crore Mkt cap
  • Industry – Pharma sector
  • Advice: Investors can BUY with a 2 year perspective

Overview: Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market. Revenues for FY17 were Rs. 725 cr. and profit Rs. 242 cr. ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years. Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues. Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good business relationships with doctors (B2D) and efficient mfg. & procurement giving high margins. At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Key risks: 1) Pending complaints with the Medical Council of India 2) Adherence to voluntary code of UCPMP 3) We are unsure that Eris will be able to maintain its high growth rates, high procurement of products and subsequently margins

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

Here is a note on Eris Lifesciences Ltd. (Eris) IPO.

IPO highlights

  • The IPO opens: 16-20th June 2017 with the Price band: Rs. 600-603 per share.
  • Shares offered to public number 2.87 cr. The FV of each is Rs. 1 and market Lot is 24.
  • The IPO in total will collect Rs 1,741 cr. while selling 21% of equity. The offer is a complete OFS and the selling shareholders will receive the entire sum. ChrysCapital’s investment arm Botticelli would be exiting by selling its current 16.3% stake. Botticelli’s average cost of acquisition in Eris was Rs 87.27/share giving them 6.9x on their investment in 6 years. The other selling shareholders are individuals who hold around 4-9% stake individually in the company. The promoter & promoter group owns 59.18% in ERIS which will fall to 55.9% post-IPO.
  • The IPO share quotas for QIB, NIB and retail are in ratio of 75:15:10.
  • The unofficial/ grey market premium for this IPO is Rs. 86/share. This is a positive.

Introduction

  • Eris is an Ahmedabad based firm that develops, manufactures and sells branded pharma products from the chronic and acute categories in the Indian pharma market.
  • Revenues and profit for FY17 were Rs. 725 cr. and Rs. 242 cr. It has 2,645 full time employees out of which over half – 1,501 are sales reps.
  • So Eris has strong sales, marketing and distribution capabilities with 7 sales divisions focused on developing and growing engagement with doctors.
  • Eris products are cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives from the chronic and acute category which are linked to lifestyle disorders. The chronic category contributed 65.6% of its revenues in FY17. The product portfolio has 80 mother brand groups (FY17) and is focused on therapeutic areas which are handled by specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. See Exhibit 1.

JainMatrix Investments, Eris Lifesciences

Exhibit 1 – Eris products, therapeutic areas, revenues and brands, Source RHP

  • Between FY13 and FY17, there has been an increase in the no. of doctors prescribing their products from 37,842 (about 13.8% of doctors in metros and class 1 towns in India) to 50,282 (15.7% of doctors in metro and class 1 towns) with a prescription share of 1.3% for FY17.
  • Eris owns and operates a mfg. facility in Guwahati, Assam. They also outsource the mfg. of some products, and currently have 20 third party mfg. vendors.

JainMatrix Investments, Eris Lifesciences

Fig 2 – ERIS Segment revenue and Fig 3 Post IPO Shareholding Pattern

  • Eris has 3 subsidiaries namely Eris Therapeutics Pvt. Ltd (wholly owned), Aprica Health (wholly owned) and Kinedex. As of June 2017, Eris and subsidiaries have registered 138 trademarks for various brand names. It has a team of 32 personnel working in its IP and R&D department.
  • In July 2016, Eris acquired trademarks in relation to 40 brands, from Amay Pharma for Rs.32.8 cr., in order to grow their product portfolio in the cardiovascular and anti-diabetics therapeutic areas. Amay Pharma’s revenues, from these brands were Rs. 19.3 cr.
  • In Nov 2016, ERIS acquired 75.48% share of Kinedex for Rs. 77.2 cr.
  • It focuses on products for mobility related disorders in the musculoskeletal therapeutic area, within the acute pain-analgesics therapeutic area. Kinedex’s revenues were Rs. 83 cr. for FY17.
  • Eris’s facility in Guwahati had a capacity utilization for tablets, capsules and sachets of 76%, 57.6% and 19.6% resp. It enjoys tax break under Income Tax Act, which will continue post GST till FY24.
  • For FY16 and FY17, the products made at Guwahati contributed to 51.6% and 59.3% of their revenues. An additional 28.2% and 18.7% of revenues for the same periods was mfg. in partnership with Sozin Flora Pharma. Eris was a partner in Sozin up to Aug 2016, and then transferred their stake to the other partners of Sozin, to enhance operational efficiency and productivity.
  • Leadership is Amit Bakshi (CMD), Kaushal Shah (Head mfg. & dist.) Sachin Shah (CFO), Rajendra Patel (Head procurement)

News, Updates and Strategies of ERIS

  • Eris with Indian Medical Association and Heart Care Foundation of India conducted a national study for ambulatory blood pressure readings amongst medical fraternity in May 2017. It was found that 50% physicians were suffering from hypertension despite taking hypertensive medicines; 56% from irregular BP at night and 21% from masked hypertension.
  • Eris will consolidate its position in therapeutic areas in which they have good presence including:
  • Targeting new categories within its existing therapeutic areas, e.g. strengthening its position in the anti-diabetes therapeutic area by launching new products.
  • Continuing to expand its network of key opinion leaders (KOL) in existing therapeutic areas and increase its coverage of specialists to drive growth in prescriptions.
  • Continuing to execute on its doctor-patient engagement model by leveraging diagnostics and technology to aid better outcomes and enhance patient compliance.
  • Eris will explore in-licensing and co-development opportunities with other pharma firms. It will also utilize its R&D efforts to target select products which are currently under patent protection in India.

Indian Pharma Market Outlook

  • India is one of the largest pharma markets in the world. Between FY13-17, revenues grew at 11.8% CAGR to reach Rs. 1,14,326 lakh cr. The IPM is the 13th largest market globally in terms of value and 3rd largest in terms of volume.
  • The IPM is expected to grow at a CAGR of 11.6% between CY16-21. The underlying growth is driven by: 1) Favorable demographics and macro-economic developments 2) Rising prevalence of chronic diseases and 3) Medical talent including specialists and super specialists 4) increasing insurance coverage and 5) the under-penetration of medical infrastructure and talent.
  • The IPM can be classified into acute and chronic The acute category comprises therapies intended for diseases of short duration and recent onset, including anti-infectives, gastro intestinal medication, vitamins and gynecology. The chronic category caters to non-communicable diseases that are prolonged in duration like heart disease, diabetes, cancer and arthritis.
  • Eris has a 0.7% market share in IPM. It was ranked 20th out of the 377 domestic and MNC firms in the chronic category, in terms of revenues, for FY17, compared to 26th in FY13.
  • Market share by revenue in the chronic category increased from 0.9% in FY13 to 1.4% in FY17.

Financials of ERIS

  • ERIS’s revenues, EBITDA and PAT grew at 16.6%, 34.7% and 42.8% CAGR in 5 years, see Fig 4.
  • The EPS has risen sharply in 5 years. This is excellent.
  • Eris has positive cash from operations and FCF all the last 5 years, Fig 5. This is a positive.

JainMatrix Investments, Eris Lifesciences

Fig 4 – ERIS Financials

JainMatrix Investments, Eris Lifesciences

Fig 5 – ERIS Cash Flow

  • Eris has declared dividend an interim dividend for FY16 amounting to Rs. 83 cr. (62.2% of FY16 PAT). Apart from this, the company hasn’t declared any dividend in the last 5 years including FY17.
  • Eris had a RoE of 44.8% in FY17 while the 3 year avg. RoE stood at 42.9% (FY15-FY17). The RoCE stands at 50.9%. These are high, healthy and consistent return ratios.
  • EBITDA margins jumped from 29.3% (FY16) to 39.7% (FY17), whereas the PAT margin increased from 22.4% (FY16) to 33.4% (FY17), reflecting a massive positive change. Such high margins were on account of low input costs, low interest costs and low effective tax rate (tax benefit at mfg. facility).
  • Eris has a reserves and surplus balance of Rs. 526 cr. which is Rs. 38.26/share.

Benchmarking

We benchmark Eris against peers from pharma sector. See Exhibit 6.

  • PE appears high at 34.25 compared to peers, but not a worry. The D/E ratio at 0.19 is comfortable.
  • The P/B ratio is high at 15.36 times, but this is because just 52% of products are mfg. in-house, and the rest is procured. As long as vendor-partners can adhere to the quality norms, it’s good.

JainMatrix Investments, Eris Lifesciences

Exhibit 6 – Benchmarking

  • Eris has witnessed fair sales but good profit growth recently. The 3 year PAT growth, EBITDA and PAT margins are high, coming in second highest of this group.
  • The return ratios are excellent and highest in the group at 45-51% each. This is a positive, and allows Eris to command premium valuations as returns are on a small equity base of Rs. 13.75 cr.
  • The company has not declared any dividend in FY17 unlike other pharma companies.

Positives for ERIS and the IPO

  • Eris is a fast growing pharma company with a portfolio of complementary products. In the chronic category, they were the fastest growing, among the top 25 in terms of revenues.
  • Eris has a portfolio of high volume and leading brands. Its focus is on metro cities and class 1 towns which have higher incidence of lifestyle disorders.
  • Eris has strong sales, marketing and distribution capabilities and good engagement with doctors.
  • The product range does not contain OTC products, so Eris has avoided the investment heavy consumer space. Instead it focuses on the B2D or Business to Doctor marketing. This we feel entails lower costs and helps maintain margins.
  • The financial health of the company is good, and the company has grown rapidly under the leadership of Amit Bakshi. He was a pharma salesman who worked in companies like Torrent, Eli Lilly and Intas and had many years of experience in the pharma industry before starting Eris.
  • Eris is immune to the global approvals/ USFDA risks as they have a domestic focused business.
  • Leadership appears to be dynamic and aggressive, and using strategies that play to their strengths.

Risks and Negatives for ERIS and the IPO

  • Eris has received letters from the Medical Council of India and certain state medical councils in connection with anonymous complaints, which allege that they have provided special benefits to several doctors. In the event the allegations are found to be true and in violation of applicable regulations and statutes, their reputation and business may be adversely affected.
  • Stricter norms in India for companies doing business in the pharma industry could affect their ability to effectively market its products. The Dept. of Pharma announced details of the UCPMP, which became effective across India from Jan 1, 2015. The UCPMP is a voluntary code which, among other things, provides detailed guidelines about promotional materials, conduct of medical reps, physician samples, gifts and relationships with healthcare professionals. Although these guidelines are voluntary in nature, they may be made mandatory in the future.
  • Will Eris be able to sustain the high growth rates and margins as it grows larger? While Eris still has a small market share in a growing market, typically pre IPO and small cap growth rates are difficult to sustain as a mid-cap firm. Competition too is intensifying in Eris’ key segments, and they will have to envision new strategies to continue on the growth path.
  • By procuring 48% of products from vendors, Eris has kept investments low and got high margins. Will this strategy be suitable in future? Any quality control problems at their mfg. facility or those of their third party mfg. may damage their reputation and expose them to litigation or other liabilities.
  • Some generic pharma sector risks: 1) If any of their products cause, or are perceived to cause, severe side effects, their reputation, revenues and profitability could be adversely affected. 2) The availability of counterfeit drugs, such as drugs passed off by others as their products, could adversely affect their brands.

Overall Opinion and Recommendation

  • As India accelerates its per capita income from a low base, a lot of the individual income gains are directed to the pharma sector for better healthcare.
  • Within the growing industry, Eris has a market share of 0.7% achieved in just 10 years of existence. There is certainly ample scope for Eris to grow both market share and absolute revenues.
  • Eris is already growing fast and stands out for the domestic focus, strong marketing & sales, good connect with doctors & medical ecosystems, and efficient mfg. & procurement giving high margins.
  • While the IPO is an exit opportunity for some investors, it empowers Eris for the next phase of growth by providing visibility and prestige, and the ability to raise fresh funds at low cost.
  • At a P/E of 34.25 TTM the valuations in the IPO are high but not aggressive, and justified by Eris’ growth rates.

Opinion: This IPO offering is rated BUY, and investors can invest with a 2 year perspective.

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DISCLAIMER

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no stake ownership or known financial interests in Eris Lifesciences or any group company. Punit Jain may choose to apply for this IPO in the Retail category. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Adviser. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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Narayana Hrudayalaya IPO – Investors may not be Patient

  • Date 17th Dec 2015
  • Price range: Rs. 245-250 and Period: 17-21st Dec 2015
  • MidCap Rs 5100 cr Mkt Cap
  • Industry – Hospital Services
  • Advice: Avoid 

Summary

  • Narayana Hrudayalaya Ltd was founded by eminent cardiac surgeon Dr Devi Prasad Shetty in 2000. It operates a national network of hospitals, clinics and primary care facilities.
  • NHL’s revenue and EBITDA have grown 30% and 23.8% CAGR over the last 4 years. But the firm slipped into losses in FY15 on account of 3-4 acquisitions.
  • NHL delivers high quality and affordable healthcare services by leveraging economies of scale, skilled doctors, process improvements and an efficient business model.
  • However margins are low. In terms of valuations, NHL has an asking PE of over 200 times FY16 (P) which is very expensive. Thus from an investment perspective, NHL is not attractive at current IPO price points. It may however look attractive for development oriented or philanthropic investors.
  • Opinion: Investors can avoid this IPO.

IPO highlights

  • IPO is open from 17-21st Dec 2015 with Issue Price band: Rs. 245-250 per share.
  • Shares offered to public: 2.45 cr roughly of Face Value: Rs.10 per share. Market Lot: 60 shares and in multiples of 60 shares thereof. Shares offered as portion of equity post issue: 12%
  • Amount proposed to be raised: Rs. 613 cr via OFS route (there is no fresh issue of shares).
  • This IPO is a liquidity event. The shareholders exiting partially are:
Exiting Shareholders

Exhibit 1 – NHL IPO – Selling Shareholders 

Introduction to Narayana Hrudayalaya

  • NHL is a Bangalore based operator of a national network of hospitals, clinics and primary care facilities.
  • NHL had revenues, Ebitda and profits of Rs 1371.6 cr., 136.6 cr. and (-10.9) cr. resp. for FY15.
  • NHL has a network of 23 hospitals (multi-specialty or super-specialty healthcare facilities which provide tertiary care), 8 heart centers and 24 primary care facilities including clinics and information centers, across 31 locations in India. Hospitals generated 90.7% of revenue, heart centers 7.3% and all others 2%.
Facilities Network

Fig 2 – NHL’s existing and upcoming hospitals/ heart centers, source RHP

  • In FY15, NHL provided care to 19.7 lakh patients in 56 facilities with 5,442 operational beds
  • NHL’s centers provide medical care in 30 specialties, including cardiology and cardiac surgery, cancer care, neurology and neurosurgery, orthopaedics, nephrology and urology, and gastroenterology.
  • NHL has 11,163 employees, including 344 doctors, 5,587 nurses, 1,996 paramedical staff and 3,236 admin. personnel. They also have 1,750 consulting doctors engaged to their network.
  • Leadership includes Dr Devi Shetty, Chairman & ED and Dr Ashutosh Raghuvanshi, MD-CEO.
  • 3 of their hospitals are accredited by the JCI, USA for meeting international healthcare quality standards for patient care and organization management, and 6 of their hospitals are accredited by the National Accreditation Board for Hospitals and Healthcare Providers, India.
  • NHL won the “Healthcare Excellence Award for Addressing Industry Issues” in 2012 from FICCI
  • NHL won the “Arcelor Mittal Boldness in Business Award” in 2013
  • NHL received the “Outstanding Achievement Award Healthcare – Social Cause” in 2015

NHL Business News and Insights

  • NHL failed to start construction work for a proposed 1,000-bed cardiac hospital. So the state govt. issued a show cause notice to NHL initiated steps to reclaim the 6 acres of land allotted to NHL near Dumuduma (Bhubaneshwar) in Sept 2008.
  • British govt owned development finance institution CDC invested Rs 300 cr in NHL for a minority share. NHL will use the funds to expand affordable treatment in Eastern, Central and Western regions.
  • NHL raised Rs 183.9 cr. from anchor investors before the IPO opened, at the top end of pricing range.
  • The cardiac hospital in Bangalore performs about 30 heart surgeries daily, the highest in the world, at a break-even cost of Rs 1.2 lakhs. This is significantly lower cost than most other hospitals in India.
  • In line with social objectives, most patients are charged more, but the poorest are treated for free.
  • M&A: NHL acquired Westbank Hospital for Rs. 150 cr. in Nov 2014, also Asia Healthcare Development (AHDL), Meridian Medical Research & Hospital (MMRHL), and Jubilant Kalpataru Hospital in 2014.
  • NHL operates its business through a combination of the following models:
    • hospitals – that they own and operate;
    • hospitals/ heart centers – operate and pay revenue share
    • hospitals, standalone clinics and primary care facilities – operate on a lease or license basis; and
    • hospital management services provided to third parties for a fee – Managed Hospitals.
  • Dr Devi Prasad Shetty is a famous heart surgeon, who founded NHL.
  • He came to the conclusion that the health care industry needs more process innovation than product innovation. The industry “does not need a magic pill or the fastest scanner or a new procedure,” but instead requires improvements that lower the cost of medical attention and make it more widely available. Shetty’s premise of economies of scale is not radical; in fact, the doctor describes his way as “the Walmart approach.” What sets him apart, however, is that he has successfully adapted the method to a field as complex and costly as cardiac care. (knowledge@wharton).
  • NHL provides free treatment or subsidized costs to certain categories of patients. This is part of NHL’s social strategy. In some cases, their agreements with partners or state governments may also specify such quotas/ subsidies. NHL then charges higher to other patients in order to recover these costs.

Industry Outlook

  • According to WHO, India’s total expenditure on healthcare was 4% of India’s GDP in 2013. India trails developed (USA, UK) and also developing countries (Brazil, Russia, China and Thailand) on spending to GDP, due to the under penetration and price sensitivity
  • India is the 10th largest economy (GDP of USD 1.9 trillion) with 20% of the people (1.2 billion).
  • The Govt. accounted for 32.2% of healthcare expenditure in India (2013) a small increase in 10 yrs.
  • A key concern India faces is the affordability of healthcare by a vast majority of its population. According to the WHO, while 58% of the total healthcare expenditure in India is borne by consumers directly (without insurance coverage or reimbursements), this proportion rises to 86% in case of private healthcare services. This has however reduced over the last decade.
  • As per CRISIL estimates the size of the Indian healthcare delivery industry is at 3,400 million treatments in volume terms and Rs 3,80,000 cr. in value terms in 2014-15. The healthcare delivery market would grow at a CAGR of 12% till 2020.
  • Cardiac care has the highest average realization per patient (CRISIL).
Exhibit 3 – Average realization for various ailments, Source RHP, JainMatrix Investments

Exhibit 3 – Average realization for various ailments, Source RHP

  • A key cost factor in a hospital is the initial capital outlay required, particularly for land, building development and equipment. The capital cost to build a hospital is typically Rs 70-80 lakhs per bed (for a typical 200 bed multispecialty hospital, excluding land costs).
  • The drivers of growth in the healthcare delivery market in India are:
    • Potential in bed capacity – India’s bed density is 7/10,000 people (global median – 27 beds).
    • Govt spending on healthcare will remain low, allowing private sector to increase presence
    • Increasing population as well as life expectancy to require greater health coverage
    • Rising income levels to make quality healthcare services more affordable
    • Growth in medical tourism, cosmetic medical services to aid demand growth
  • Anecdotal evidence points to falling medical standards in large hospitals:
    • Cesarean births are rising alarmingly as a ratio to natural deliveries in many regions.
    • Many large urban hospitals target affluent patients with a battery of unnecessary tests and procedures, effectively milking the patient under the guise of a doctor’s line of treatment.
    • Medical services are only as good as the person serving you. Stories abound of medical negligence like silly errors during operations, nurses and staff missing pre or post operation, etc.
    • Inflated medical bills for patients with insurance
  • There appears to be a shortage of medical nursing staff. This is attributed to a lack of professional growth in India (and ample opportunities abroad). Nurses in India are not allowed to carry out simple medical tasks, which are reserved for doctors, thus limiting their professional growth.
  • Medical Colleges and higher education are constrained by limited seats and high costs.
  • Many such issues fall under the purview of the Medical Council of India.

Financials of NHL

  • The EPS of NHL has grown 32.5% CAGR from the year 2011-2014 which is a positive sign of high growth potential. However in FY15 NHL posted a loss of Rs 10.9 cr. Also again it has turned PAT positive for HI FY16. Note FY16P data is a simple doubling of H1 data.
  • NHL’s revenue and EBITDA has grown 30% and 23.8% CAGR over the last 4 years. This is excellent.
  • Margins have become thinner for NHL in the last 4 years. See Fig 4.
Fig 4 – NHL Financials, JainMatrix Investments

Fig 4 – NHL Financials, JainMatrix Investments

  • NHL has been operating cash positive over 5 years, but the free cash flows are negative. Fig 5.
Fig 5 – NHL cash flow, JainMatrix Investments

Fig 5 – NHL Cash Flow

Positives for the IPO

  • NHL has a social commitment to provide subsidized/free services to some patients.
  • Dr Devi Shetty has through NHL created a ‘Walmart’ type business model for high end services like heart surgeries, and has lowered costs while delivering high quality. This is widely recognized in the industry and NHL/ Dr Shetty have been awarded many times for these achievements.
  • NHL has a strong brand ‘Narayana Health’ with good presence in Karnataka & East India. Its has a reputation for clinical excellence and affordable healthcare.
  • NHL is setting up in the NorthEast and Vaishno Devi (where hospital facilities are scarce), Lucknow (multi-specialty hospital), Mumbai (pediatric hospital) and Bhubaneshwar (tertiary care).
  • NHL is strong in many segments, but particularly in cardiology and cardiac surgery.
  • Capital efficiency – NHL’s capital cost is Rs 25.5 lakhs/bed in FY2015 (industry avg 70-80 lakhs/ bed).
  • Ability to attract high quality doctors and medical support staff.
  • Experienced management team with a strong execution track record.
  • Anecdotal evidence suggests that the NHL chain appears to have a better reputation in terms of patient care, good medical advice and trustworthy services than other large hospital chains.

Internal Risks 

  • Dr Devi Shetty has built NHL to this scale, but there may be a need to broad base the firm’s leadership so that it can become an institution, rather than be dependent on a few leaders.
  • Just three large hospitals contribute 58% of total revenues currently. Thus any disruption to any of these 3 will affect their business.
  • A majority of NHL doctors are not employees but medical consultants. There is no assurance that they would continue to provide services to NHL on an ongoing basis. This can affect business.
  • NHL has in the past ceased operations and decommissioned beds at some facilities. NHL may not be able to successfully implement all their growth strategies, particularly in Tier II and Tier III cities.
  • Litigation related to medical services, from patients is a business risk.
  • They recently acquired a third party hospital and two hospitals companies. These and any future acquisitions may present integration challenges or turn out to be unprofitable. Acquisitions carry the inherent risk of past non-compliance and undisclosed liabilities.
  • NHL is exposed to business risks related to clinical trials undertaken and stem cells they preserve.
  • The IPO is a liquidity event and an exit platform. Funds raised will not benefit NHL.

External Risks

  • In general, a number of govt. and regulatory registrations, licenses and approvals have to be obtained. In particular, Narayana Hospitals and AHDL have not obtained occupancy rights over certain hospitals and clinics they operate out of, and not obtained ownership rights over certain lands forming part of NH Health City and certain superstructures constructed by them in RTIICS. They run the risk of being dispossessed of these properties. (RHP)
  • The Central or State Governments may exercise rights of eminent domain in respect of the land on which NHL’s facilities are situated.

Benchmarking

In a benchmarking exercise, we compare NHL with some listed peers.

Exhibit 6 - Benchmarking, JainMatrix Investments

Exhibit 6 – Benchmarking, JainMatrix Investments

  • Sales at NHL have shown an impressive growth.
  • But valuations look expensive. Since there was a loss in FY15, the PE is not mentioned. But estimated PE for FY16 falls in the 200-205 range, a very high number.
  • Even on EV/EBITDA and EV/ Sales, NHL falls at the higher end among its peers.
  • Debt levels are reasonable, not high. But return ratios are quite low.
  • The reason we can find for low margins and even losses in FY15 are – several acquisitions were made in this year, which are integral with NHL’s growth strategy. However these operations are yet to contribute to the returns for NHL.

Overall Opinion

  • India with its large and growing population is badly stretched in terms of quality healthcare facilities. Expenditure in this sector will trend upwards. Govt’s (free) facilities cater to the low end of market.
  • NHL has a good brand name and sustainable model for providing quality and affordable healthcare. It has lowered the costs of delivering complex procedures, while also meeting social objectives.
  • The pricing for NHL IPO looks stretched from various angles. In FY 2015, NHL suffered a loss. At the projected FY16 profits, the PE looks like 200-205 times.
    • Perhaps NHL has in an attempt to grow fast and acquire companies, compromised on profits for FY2015 and FY2016. Modern companies are making such trade-offs.
    • Perhaps NHL has sacrificed profits for its social objectives. It can easily improve margins but takes on a number of free or subsidized procedures and ‘does good rather than just make money’.
    • Can the trustworthiness and technical competence at NHL justify a big pricing premium to the peers in Exhibit 6?
  • NHL does not have positive free cash flows since 5 years.
  • NHL executives need to clearly articulate their profit or social objectives to potential investors and shareholders, especially since these clash with each other.
  • We conclude from this that for investors, NHL is not attractive at current price points. But it may look attractive for development oriented or philanthropic investors.
  • Investors should avoid this IPO and look to enter the counter at lower levels.

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JainMatrix Investments_Narayana Hrudalaya IPO_Dec 2015

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Narayana Hrudalayala Ltd. or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Dr Lal Pathlabs IPO – Essential Services are an Essential Buy

  • Date 9th Dec 2015
  • Price range: Rs. 540-550 and application period: 8-10th Dec
  • Industry: Pharma – Diagnostic services
  • Mid Cap – Rs 4550 cr Mkt Cap 
  • Advice: Retail Investors can BUY with a 2-3 year perspective

Summary

  • Overview: DLP is provider of diagnostic and related healthcare tests and services.
  • DLP’s Revenue, EBITDA and EPS have grown at 29.2%, 29% and 33.9% CAGR over 4 years.
  • Key strengths are a proven, robust ‘hub and spoke’ model which allows consistent service levels and rapid growth. It is the #2 player in this space, with a strong North India presence. It has a good brand in this niche, which can be leveraged. DLP’s model is scalable; its reach can be expanded rapidly. Also it’s not a discretionary service, more like an essential service.
  • In terms of valuations, DLP has an asking PE of 54.5 times FY16 (P) which looks expensive. However we feel that the business can be valued closer to retail food services than hospitals.
  • As an investment, the DLP IPO is rated a medium risk, high return type of offering.
  • Opinion: Investors can subscribe to this IPO for a 2-3 year perspective.

Here is the investment note on Dr Lal Pathlabs (DLP).

IPO highlights

  • IPO is open from 8-10th Dec 2015 with Issue Price band: Rs.540-550 per share
  • Shares offered are 1.16 cr. of FV: Rs. 10 per share, and amount to be raised: Rs.638 cr. via OFS route. Shares offered as portion of equity post issue: 14.1%.
  • Market Lot: 20 shares and in multiples of 20 shares thereof.
  • There is a Rs 15 discount for Retail.
  • Objects of the issue: Promoters, promoter group and investors are exiting partially from their investments. No funds raised in IPO will benefit the company directly.
  • The promoter stake will reduce from 63.7% to 58.7% post IPO. Also the Pre IPO shareholding of the private investors/ VCs was 32.2% which would get reduced to 23.2% once the shares get listed.

Introduction

  • DLP is a Delhi based provider of diagnostic and related healthcare tests and services.
  • DLP had revenues, EBITDA and profits of Rs 662 cr, Rs 158.9 cr and Rs 95 cr. in FY15.
  • DLP’s network includes National Reference Lab in New Delhi, 171 clinical labs, 1,554 patient service centers and 7,000 pickup points. Network is all India, but unevenly spread, see Fig 1-2.
  • Customers include individual patients, hospitals, other healthcare providers and corporates.
  • DLP is staffed with 3,253 full-time employees and 83 full-time consultants (contractual).
  • DLP has built a national, “hub and spoke” network. Specimens are collected across multiple locations in a region for delivery to a designated clinical laboratory for centralized diagnostic It provides them with greater economies of scale and is the platform for good growth.
  • DLP provides has over 3,495 diagnostic and related healthcare tests and services including – Routine clinical lab tests (blood chemistry analyses and blood cell count), Specialized testing (histopathology, genetic marker, viral and bacterial cultures and infectious disease); and Preventive testing services (screenings for hypertension, heart disease and diabetes).
  • DLP was started by late Dr. Major S.K. Lal in 1949, by providing pathology services and maintaining a blood bank. The current leadership is Brig. Dr. Arvind Lal (CMD), Dr. Vandana Lal (Dir.), Dr. Om Prakash Manchanda (Dir & CEO) and Mr. Dilip Bidani (CFO).
  • The Pre IPO shareholding of private investor/ shareholders was 32.2% which would get reduced to 23.2% post IPO. Private equity/ VC investors like Wagner Ltd., WestBridge Crossover Fund, LLC and Sanjeevini Investment Holdings are associated with DLP.
  • The key strategy of DLP is to continue to expand their presence in the markets in which they operate and also into other markets in India through strategic acquisitions and partnerships.
  • For FY15, 72% of the revenues were from the Northern region. Currently the focus of the company is to strengthen and expand their presence in Central and Eastern India. A new large, regional reference laboratory is under construction in Kolkata.
Fig 1 - Revenue Segments, JainMatrix Investments

Fig 1 – Revenue Segments, JainMatrix Investments

Fig 2 – Service Network, Source DRHP

Business News and Updates

  • DLP had announced its plan to expand operations in Bengaluru through new centers and labs to reach a total number of 50 centers (from current 20) by Dec 2015.
  • BD India and DLP inaugurated a Centre of Excellence in Phlebotomy (blood collection, sampling) in June 2015. This center was launched to provide certified phlebotomy courses to healthcare professionals, and improving best practices for accurate and reliable diagnosis.
  • DLP had acquired Ashish Pathology Labs, a lab in Ahmedabad as part of its acquisition strategy to expand inorganically last year. It has been growing mainly through organic expansion. In northern, eastern and central India it has been adding 20-25 labs year on year.
  • As per DLP, “each lab costs around Rs 1 crore and there are additional investments in facilities like IT among others. Overall, we invest Rs 40-50 crore for our expansion every year”.
  • DLP has sample collection centers in 9 countries and plans to start in Africa with Nigeria.
  • Per latest data, DLP on day 2 of IPO is 2.65 times subscribed a sign of good success.

Industry Outlook

  • According to the World Health Organization (WHO), India’s total expenditure on healthcare was 4% of the GDP as of 2013. India trails both developed countries (USA, UK) and also developing countries (Brazil, Russia, China and Thailand) in healthcare spending % of GDP. This is due to the under penetration of healthcare services as well as partial govt. ownership.
  • As per CRISIL Research, the Indian diagnostics industry is at Rs 37,700 cr. in FY15. It will continue to grow by 16-17% CAGR over the next three years to over 60,000 cr. by FY18.
  • Demand drivers for the Indian diagnostic industry include:
    • Increase in evidence-based treatments; Changing disease profiles; big demand-supply gap;
    • Increase in health insurance coverage; Need for greater health coverage as population and life expectancy increase; Rising income levels make quality healthcare services affordable
    • Growing demand for lifestyle diseases-related healthcare services
  • Urban areas account for a higher proportion of revenues in diagnostics industry, as the urban population (28% of population) contributes 67% of revenues (CRISIL Research).
  • DLP trails only Fortis Healthcare controlled SRL in the diagnostics business. SRL had acquired Piramal Diagnostics to become the top player in the industry four years ago.
  • The Govt. accounted for 32.2% of healthcare spends in India (2013), a small increase in 10 yrs.

Financials of DLP

  • DLP’s Revenue, EBITDA and EPS have grown at 29.2%, 29% and 33.9% CAGR over 4 years.
  • This is excellent as it indicates that the business is in high growth mode. Even with increasing competition and declining margins, the performance looks good. See Fig 3.
Fig 3 - Pathlabs Financials, JainMatrix Investments

Fig 3 – Pathlabs Financials, JainMatrix Investments

  • However H1FY16 results were disappointing and the projected EPS for FY16 is Rs 10.1, whereas it was Rs 11.5 for FY15. This is a negative sign. Note FY16P data is a simple doubling of H1 data, also accounting for one time/ exceptional charges related to IPO.
  • Currently DLP has zero outstanding borrowings as well as term loans. This is a big plus from the financial perspective. DLP has the option to raise funds in future if required.
  • The operating margins have declined to 24% from 25.5% in 2012. However the profit margins have improved from 12.4% in 2011 to 14.3%. But Profit margins fell in H1FY16 to 9.2%.
  • DLP’s operations have been both operating and free cash flow positive since 5 years. This is positive. But there is a declining trend due to increasing investments in the business. Fig 4.
Fig 4 - Cash Flow, JainMatrix Investments

Fig 4 – Cash Flow, JainMatrix Investments

Positives for Dr Lal Pathlabs and IPO:

  • DLP financials have shown strong growth in 4 years. DLP has been acquiring small medical labs to grow inorganically. Such growth is also sustainable.
  • DLP has a strong footprint in the North. Expansion in South & East will give a further impetus.
  • They have built a good brand in diagnostics which is likely to strengthen in the near future.
  • DLP uses a ‘Hub and Spoke’ business model, which allows consistent service levels and rapid growth.
  • Experienced leadership team includes professionals with strong industry expertise and track record.

Internal Risks

  • The Dr Lal PathLabs brand is fundamental to their business, and any failure to maintain the quality of their diagnostic healthcare services provided could affect their business.
  • Business interruptions at DLP’s National Reference Laboratory may also affect operations.
  • DLP’s business depends on franchisees and business partners. Any non-performance by them may adversely affect DLP. Some of their lab operations are undertaken jointly with third parties, whose interests may differ from DLP’s, and such arrangements entail certain risks.
  • DLP leases the majority of its laboratories and other business premises. They might not be able to renew any such leases on favorable terms, and costs will rise.
  • DLP is subject to seasonal fluctuations in operating results and cash flows. Diagnostic healthcare testing volumes typically increase during the monsoon season and experiences slower business during Dec-Jan, when the temperature and humidity are lower.
  • For DLP, the employee benefit expenses have risen sharply over the last 5 year reflecting shortages in medical / doctor staff. If this accelerates, it can impact profitability.

External Risks

  • DLP operates in a competitive business environment which has low barriers to entry.
  • Diagnostics business is still dominated by unorganized local centers rather than large chains.
  • The business is subject to a variety of central and state govt taxes and surcharges, and any increase in tax rates — such as GST, could adversely affect their financials.
  • Political instability or disruptions at locations where they operate can affect business.

Benchmarking

Exhibit 5 - Benchmarking, JainMatrix Investments

Exhibit 5 – Benchmarking, JainMatrix Investments

We compare DLP with hospital chains as well as retail focused service companies:

  • DLP emerges quite strongly across parameters like margins, growth, and return ratios.
  • It does not lead the pack on the valuation parameters.
  • Based on this it appears that the valuations of DLP may fall somewhere between established hospital chains and the leading retail service business.

Overall Opinion

  • India with its large and growing population is stretched in terms of available healthcare facilities. Expenditure in this sector will trend upwards. Govt’s (free) facilities cater to the low end of market.
  • In this space, DLP’s diagnostic and healthcare services provide an essential, high demand service. Its not a discretionary service, more like an essential service.
  • The business model is robust and scalable, and there are clear benefits of a national chain over small and local service providers.
  • DLP has a good brand and solid service delivery in the North, where it is established. We believe that DLP will be able to grow and roll out a national (urban) footprint. The next target would be semi urban and rural areas. There is massive potential to grow over the next 10 years.
  • In terms of valuations, DLP has an asking PE of 54.5 times FY16 (P) which looks expensive. However we feel that the business can be valued closer to a retail food service than a hospital. DLP’s model is scalable; its reach can be expanded rapidly.
  • As an investment, the DLP IPO is rated a medium risk, high return type of offering.
  • Retail Investors can BUY this IPO with a 2-3 year perspective.

READ AND DOWNLOAD THE ENTIRE REPORT

Here is a note on the Dr Lal Pathlabs IPO in PDF format.

JainMatrix Investments_Dr Lal PathLabs IPO_Dec 2015

Click the link above to open/ download the PDF document.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Dr Lal Pathlabs Ltd. or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Alkem Labs IPO

Dear Reader,

The IPO season in India continues with another bunch of offerings planned in December 2015.
We have created a new IPO report on Alkem Labs.
It is the first large pharma company IPO in over 10 years.
Its got a lot going for it. At the same time, the criticism can be on the grounds of high valuations, litigation, low exports proportions, etc.

We’ve had good success with our IPO reports, and at one time provided readers 60.5% returns within one year on our recommended IPOs.

Starting this IPO, we will restrict some of our IPO reports to our Subscribers for the Investments Service. However we share with you the IPO highlights:

IPO highlights

alkem labs, jainmatrix investments

  • IPO is open from 8-10th Dec 2015 with Issue Price band: Rs.1020 -1050 per share
  • Shares offered in IPO are 1.29 crores of Face Value: Rs.2 per share
  • Minimum lot size: 14 shares and multiples of 14 thereof.
  • Shares offered as portion of equity post issue: 10.75% approx.
  • Amount proposed to be raised: Rs.1350 crores via OFS route.
  • There is no fresh issue. The promoter stake would reduce from the existing 70.9% to 66.2% post IPO.
  • Objects of the issue: Promoters, promoter group and investors are exiting partially from their investments. No funds raised in IPO will benefit the company directly.

Good luck and happy investing,

Punit Jain

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  12. Large Cap and Mid & Small Cap Portfolio reports (premium content)
  13. Seven Short Steps to Long Term Investing Success

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Alkem Laboratories or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Syngene Post IPO report

Post IPO report dated 17th Aug 2015

Dear Investor,

Here is a short post listing report on the Syngene International IPO.

  • The IPO that was open from 27-29th July received excellent response with a 32.05 times over-subscription.
  • While Retail was only 4.8 times oversubscribed, the QIB portion was over 51.5 times and non institutional investors (NII) category was over a massive 90.2 times.
  • The IPO price was declared at the upper end of Rs 250. We saw the positive mood continuing on the listing  date also.
  • Listing happened on 11th Aug and was enthusiastic as the share closed with a 24% gain at Rs 310.
  • Today, one week from listing date, the share is at Rs 347, a solid 39% gain for investors.

For us at JainMatrix Investments, this is another win with a correct analysis so far.

Happy investing,

Punit Jain

IPO report dated 27th July 2015

  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Syngene International Limited or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

Syngene IPO: Good Pharma R&D spinoff from Biocon

  • Date – 27th July 2015
  • Issue Price range: Rs. 240-250 and Issue Period: 27-29th July 2015
  • Target Market Cap Rs 5,000 crore and Industry – Pharma R&D
  • First day – 32% subscribed
  • Advice: Buy for 2-3 years

The Syngene IPO is a first time offer from the high potential sector of pharma R&D Outsourcing. The Income, EBITDA and Profits have grown well at 18.2%, 30% and 31.3% CAGR resp. over 5 yrs. There is ample global growth possible if Syngene is able to manage scale and efficient operations. The valuations are high by Indian IT services levels, but is justified by sector leadership & innovation. Investors may BUY with a 2-3 year perspective.

Here is a note on Syngene International Limited IPO.  (Syngene)

IPO highlights

  • The Syngene IPO is open from 27-29th July 2015 with Issue Price band: Rs. 240-250 per share.
  • Shares offered in IPO are 2.2 crores, of Face Value Rs 10 per share, which is 11% of their post-Offer equity share capital. This will raise Rs.550 cr. and target market cap is Rs 5,000 cr.
  • Minimum bids: 60 shares & multiples thereof. Minimum investment: Rs. 14,400.
  • The IPO involves no equity dilution, and IPO proceeds will flow to the promoter, Biocon Ltd.
  • The P/E of Syngene are 30.3 – 31.5 times estimated FY15 earnings, at lower/upper price limits.
  • The company has already raised Rs 150 cr. from anchor investors.
  • To understand Syngene better, we first see a snapshot of the listed parent company Biocon.

Biocon Ltd. Snapshot

  • Biocon Ltd is engaged in developing medicines (generic insulins and biosimilar monoclonal antibodies) for addressing chronic diseases for cancer, diabetes and autoimmune patients.
  • FY15 revenues were 3,300 cr and PAT 528 cr. The Income, EBITDA and Profits have grown at 15%, 9% and 10% CAGR respectively over 5 years. See Fig 1.
Biocon financials, JainMatrix Investments

Fig 1 – Biocon Financials, JainMatrix Investments

  • It had its IPO in 2004, at a price of Rs 315. There was a 1:1 bonus issue in 2008, so with the CMP of Rs 465, the share has given shareholders a 10.3% CAGR return over 11 years. The Sensex gave 15.3% CAGR in this period, so Biocon underperformed the Sensex by 5% CAGR.
  • Overall we rate Biocon as an average performer.

Introduction to Syngene

  • Syngene started in 1993 at Bengaluru, and is a subsidiary of Biocon. It is engaged in providing contract research and manufacturing services for pharma sector. It is one of India’s leading Contract Research Organisations (CRO) in the $14.7 bn global pharma CRO market.
  • Revenues in FY14 were Rs 708 cr and profits Rs 135 cr. It has 2,667 employees, incl. 2,096 scientists.
  • It offers a suite of integrated, discovery, development and delivery services for novel molecular entities (NMEs) across sectors like pharmaceutical, biopharma, and biotechnology.
  • It is primarily an export oriented business, see Fig 2.
Syngene Segments, JainMatrix Investments

Fig 2 – Syngene Business Segments, JainMatrix Investments

  • With a laboratory area of 9 lakh sq. ft., Syngene currently services over 200 clients, ranging from MNCs to start-ups, including 8 of the top 10 global firms. It has dedicated research centers with Bristol-Myers Squibb, Abbott Labs and Baxter International.
  • Syngene helps its clients in conducting discovery (from hit to candidate selection), development (including pre-clinical and clinical trials, analytical and bio-analytical evaluation, formulation development and stability studies) and pilot manufacturing (scale-up, pre-clinical and clinical supplies) each with distinctive economic advantage.
  • In addition to research staff dedicated to a particular client, Syngene also offers resources through flexible business models like a full-time equivalent (“FTE”) and fee-for-service (“FFS”).
  • Syngene is planning investments in the next three-four years of a new mfg. facility, a center for work on biologics and formulations (Bengaluru) and also to expand existing facilities. This will be with funds raised from internal accruals and debt.
  • The leadership team is Kiran Mazumdar Shaw (MD) and Peter Bains (ED/ CEO).
  • Silver Leaf Oak, a private equity fund acquired 10% stake in Syngene in 2014.

Financials of Syngene

  • The Income, EBITDA and Profits have grown at 18.2%, 30% and 31.3% CAGR resp. over 5 years. See Fig 3.
  • The EPS, adjusted for the IPO has grown by 31.4% CAGR over 5 years.
Syngene Financials, JainMatrix Investments

Fig 3 – Syngene Financials, JainMatrix Investments

  • The business has been Cash Flow positive for 4 of the last 6 years. Of late, the firm has been investing heavily in its business. In FY15, the Free Cash Flow has been positive. See Fig.4.
  • RoCE and RoE metrics are quite impressive, which are at 30.5% & 20.5%.
  • Finance costs decreased by 94% in FY14 (from 6.5 cr. in FY13) on account of repayment of debt. In addition there were forex losses in FY15. As a result, in FY15 we see that there is negative cash from operations and positive flow from Investments.
Cash Flows, JainMatrix Investments

Fig 4 – Cash Flows (Chart by JainMatrix Investments)

  • Shareholding Pattern (%): Post-issue the shareholding pattern will be Promoter Group 74.5%, Institutions and Public 22.1% and Non Promoter & Non Public is 3.3%. See Fig 5.
Shareholding Patterns, JainMatrix Investments

Fig 5 – Shareholding Patterns, JainMatrix Investments

Business and Industry Notes 

  • CRO firms offer outsourced services to support R&D driven organizations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics.
  • CRO services for pharma sector span the range of R&D activities from New Molecular Entity (“NME”) discovery, development and manufacturing.
  • CROs offer clients an opportunity to manage costs, have flexible operations and realize efficiencies in R&D and related functions. However most CRO service providers specialize to some degree based on the needs of their clients and the market in which they operate.
  • As per Frost & Sullivan estimates, global R&D expenditure for the pharma industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced. According to the report, outsourcing penetration for the CRO market for development services as of 2014 is estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%.
  • Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D. The CRO industry has grown substantially in recent years and there is also an opportunity to grow through an increase in market share.

Positives for the IPO

  • Syngene has plans for capex of Rs 1200 cr. over the next 3‐4 years. Out of this, one half would be for expanding existing facilities and the rest for setting up a new facility at Mangalore.
  • Syngene has 2,096 scientists, including 259 PhDs, and 1,661 scientists with master’s degree. Resource knowledge and experience is the major asset for Syngene.
  • Syngene has a good track record in compliance, getting a clean chit in three audits conducted by the US Food and Drug Administration (USFDA) over the past 18 months.
  • Syngene has already signed commercial supply contract for 3 molecules with its clients. Besides, the company has a list of potential molecules lined up from its clients to sustain its base business over the medium term.
  • Syngene is the first listing of an Indian pharma CRO firm. It is thus a leader and an innovative company and may receive a premium valuation.
  • There is a good synergy between the Biocon (pharma manufacturing) and Syngene (CRO). This will help Syngene in its planned growth.

Negatives and Risks

  • Syngene’s top 10 clients gave 72% of its revenues in FY15. There is a dependency on a few large clients, and the financials of Syngene can be affected in case loss of any of these clients.
  • There are a number of pending litigations against Syngene, under heads Tax Matters, Threatened Litigation and Pending CIL Litigation (former subsidiary); and Litigation by and against the Promoter, all numbering close to 100. An adverse outcome in these proceedings may affect the reputation and financials, and harm future business.
  • The FY14 balance sheet showed Contingent Liabilities totaling to Rs. 181.3 cr. which if materialized may adversely affect the profitability of the company.
  • Intensifying competition for pharma CRO services.
  • The Syngene financial performance can be affected by INR/ USD price fluctuations. In addition, international economic, taxation and outsourcing policy changes can materially affected operations.
  • Ability to attract, retain and develop key personnel and R&D talent.
  • The pharma sector faces many IP related compliances and legal challenges. Syngene needs to ensure it stays protected and safe from such issues.
  • Clients need high secrecy and confidentiality as R&D work is for multi-billion dollar new drugs. Syngene needs to ensure that at the group and employee level, information stays safe.
  • Regulatory tightening of clinical trials in India has slowed the work on Indian clinical trials.

Benchmarking

As there are no listed companies in India that are directly comparable to Syngene, we benchmark the firm against IT services, KPO and PHARMA firms like Biocon, eClerx, Glenmark and Mphasis Ltd.

Benchmarking, JainMatrix Investments

Fig 6 – Benchmarking of Syngene, JainMatrix Investments

  • Based on Fig 6, we come to the following conclusions.
  • Syngene revenue growth is impressive. On margin parameters, it ranks second after eClerx.
  • Syngene rates high on RoCE and RoE.
  • For an early stage company, Syngene appears good in terms of low debt and financials.
  • Syngene’s closest listed peer outside India is a Chinese firm, Wuxi Pharmatech, which is four times bigger in revenues, and is trading at a PE of 30.

Overall Opinion

  • The Syngene IPO is a first time listing from a new and high potential sector of pharma CRO.
  • This business builds on Indian advantages in IT services and KPO, with a pharma sector focus. The benefits have shifted from cost arbitrage to enhancing R&D productivity and reducing time to market.
  • The promoters have an average record of providing returns to shareholders in Biocon. However, Syngene represents a high potential business segment, which is being spun off.
  • The success of competition, eg Wuxi Pharmatech, indicates that there are ample opportunities for Syngene to grow and compete in the global market.
  • We are positive on the prospects of Syngene in this IPO offering. Buy at cut off with a 2-3 year investment perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. JM has no known financial interests in Syngene International Limited or any related firm. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.