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Wednesday, January 13, 2016

NANDAN DENIM LTD: STYLE YOUR PORTFOLIO !!!

Scrip Code: 532641 NDL
CMP:  Rs. 150.25; Market Cap: Rs. 687.79 Cr; 52 Week High/Low: Rs. 174.00 / Rs. 56.10
Total Shares: 4,55,49,056 shares; Promoters : 2,77,58,720 shares – 60.94 %; Total Public holding : 1,77,90,336 shares – 39.06 %; Book Value: Rs. 56.84; Face Value: Rs. 10.00; EPS: Rs. 12.96; Dividend: 16.00 %; P/E: 11.59 times; Ind. P/E: 20.16; EV/EBITDA: 6.30x
Total Debt: Rs. 470.86 Cr; Enterprise Value: Rs. 1,136.08 Cr.

NANDAN DENIM LIMITED: The Company was founded on August 09, 1994 and is headquartered in Ahmedabad, India. It was earlier known as Nandan Exim ltd and changed its name to Nandan Denim in 2013. It is part of the Chiripal Group, which has multiple businesses including textiles, real estate, education and construction. The company commenced commercial operation in 1999. It was initially involved in the trading of textile fabrics. The company came with an IPO in May 12, 2005 with issue size of 60 lakh shares of face value of Rs. 10 each at the price of Rs. 20 per share raising Rs. 12 Cr for foraying into denim and cotton fabric production. The Company had declared split in face value of its shares from Rs. 10 to Rs. 1 on 01 September 2005 and on 05 August 2011 it consolidated its face value from Rs. 1 to Rs. 10. The company declared last bonus on 31 October 2006 in ratio of 1:1. Nandan Denim Limited (Nandan Denim) is an India-based denim manufacturer. The Company's products include shirting fabrics, engineered khakis and denim home. Nandan Denim manufactures shirting fabrics for fashion garments and accessories applications. The Company manufactures khakis fabrics for fashion garments and accessories applications. It also manufactures handcrafted masterpieces made from denim fabric and natural indigo. The Company's installed capacity is around 110 million meters per annum (MMPA) for denim fabric, approximately 10 MMPA for yarn-dyed shirting, and around 124 tons per day (TPD) for yarn manufacturing. The Company exports its denim fabric to around 30 countries across the globe. Over the years, the company has expanded its denim fabric manufacturing Capacity and has established itself as one of the leading players in the Indian denim fabric industry. Currently, the company has a denim fabric processing capacity of 110 mmpa and shirting fabric processing capacity 10 mmpa. NDL’s denim fabric manufacturing plant is located in Ahmadabad, Gujarat. Since its inception, Nandan has been looking to the growing demand in Denims bottom-wear and shirting fabrics. Nandan has stood by its commitment to provide quality at the best price. To add to its glory it is now Nandan Denim Limited has an ISO certification and Oeko-Tex certification on its credit. Nandan Denim annually makes 100 million metres of fashion fabrics enough to go around Earth 2.5 times. NANDAN DENIM Ltd is locally compared to Arvind Mills, Aarvee Denims & Exports Ltd, Sudarshan Jeans Pvt Lts, Etco Denim Ltd, Ashima, Bombay Dyeing The Ruby Mills Ltd, Tuni Textiles Mills, Subh Tex (India) Ltd, Rainbow Denim Ltd, Dhanlaxmi Fabrics India Ltd, Santogen Exports Ltd, Alka India Ltd, Shri Lakshmi Cotsyn, Morarjee Textiles and globally with Michael Kors Holdings Ltd of USA, Guess? Inc of USA, PRADA SPA COM of Europe, Joe’s Jeans Inc of USA, Fossil Group Inc of USA, Ralph Lauren Corp of USA, VF Corp of USA, St. John Knits International Inc of USA, Ever-Glory International Group Inc of USA, Billabong of Australia, Speacialty Fashion group ltd of Australia, United Clothing FZE of UAE, Denim Area Industrie SPA of Italy, Berto E.G. Industria Tessile of Italy, Aqua Fabrics of Italy, Textile Canatiba from Brazil, Vicunha Textiles from Brazil.  

Investment Rationale:

NANDAN DENIM LTD is a part of Chiripal group and currently the second largest integrated denim fabric company in India based in Ahmedabad. Chiripal group is widely recognized as the Textile House with manufacturing facilities for POY, Texturising, Cotton Spinning, Denim Weaving, Knitting and Processing, Home Furnishing. NDL manufactures and supplies quality grey cotton fabrics, khakis and denims. Denim contributes 90 % of the total revenue to the company. It has invested heavily in capacity expansion to become the largest denim company in India and fourth largest in the world by March 2016. Nandan Denim was in the business of trading of fabrics in domestic and international markets. During FY04, it commenced implementation of Weaving (Grey) project. Currently, the exports account for nearly 10 % of sales. NDL is second largest denim player in the India with 99 mn meters per annum, and also has 10 mmpa manufacturing capacity of shirting fabrics. NDL is the largest denim suppliers to global brands such as Carrefour, Ralph Lauren Corp, Polo, A/X, Tomy Hilfiger, Gini & Jony, CP Colorplus, Mufti, Killer, Spykar etc. India’s textiles sector is one of the mainstreams of the national economy. It is also one of the largest contributing sectors in India’s exports, contributing around 11 % to the country’s total exports basket. The textiles industry is labour intensive and is one of the largest employers. The industry realized export earnings worth US$ 41.57 billion in 2013-14. The textile industry has two broad segments, namely handloom, handicrafts, sericulture, power looms in the un-organised sector and spinning, apparel, garmenting, made ups in the organised sector. The Indian textiles industry is extremely varied, with a hand-spun and hand-woven sector at one end of the spectrum, and the capital intensive sophisticated mill sector at the other. The de-centralised power looms and knitting sector forms the largest in textile and within that knitting sector forms the largest section. The close linkage of the industry to agriculture and the ancient culture, the traditions of the country make the Indian textiles sector unique in comparison to the textiles industry of other countries. This also provides the industry with the capacity to produce a variety of products suitable to the different market segments, both within and outside the country. The future for the Indian textile industry looks promising, buoyed by both strong domestic consumption as well as export demand. With Consumerism and disposable income on the rise, the retail sector has experienced a rapid growth in the past decade. The organised apparel segment is expected to grow at a Compound Annual Growth Rate of more than 13 % over a 10-year period. Also Indian denim capacity is poised to reach 2 billion meters per annum (bmpa) by 2018 from 1.2 bmpa currently, signifying 18.5 % CAGR. In contrast, international market capacity is likely to grow at 3 % to 5 % CAGR. Of the current 1.2 bmpa Indian denim capacity, usable installed capacity is about half of 1 bmpa. Domestic market demand for denim is of 800 mmpa while the balance 200-300 mmpa is exported. India houses 10 % of global denim capacity and NDL manufactures 10 % of Indian denim capacity. Nandan Denim is poised to become the largest manufacturer of denim fabrics in India after its expansion of its capacity to 110 mn meters per annum (mmpa). In India, Arvind Ltd has capacity of 130 mmpa and Aarvee has capacity of 84 mmpa, Sudarshan Jeans has capacity of 70 mmpa, ETCO Denim has capacity of 50 mmpa. However NANDAN is still behind its global competitors like Vicunha Textiles which has capacity of 230 mmpa, iSKO which has the capcity of 200 mmpa and Tavex corporation which has the capacity of 160 mmpa. NDL, Arvind and Aarvee, (together) would constitute one-third of the Indian denim industry. Consumption in India is skewed with 7 % of population consuming 49 % of denim. Male segment contributes 85 % to the total consumption while balance 15 % is consumed by female and kids segment. The overall denim market is expected to witness higher growth rates due to their lower base and increasing focus of brands and retailers on those segments. Denim is of the most promising category in India’s apparel market. In 2013, the denim market of India was worth Rs. 13,500 Cr (NDL having 10 % share with Mcap of Rs. 689 Cr) which accounts for 5 % of the total apparel market of the country. As per a report, the world trade in denim fabric averaged 670,000 tonnes over the past one decade, while in value terms; it fluctuated between $3 billion and $3.5 billion. India accounts for 5 % of this trade. Going forward, a large part of the growth of denim apparel shall be driven by deeper penetration in the smaller cities with increasing acceptance of denim within India. The Indian denim market is projected to grow at 15 % CAGR to become Rs. 27,200 Cr market in 2018 owing primarily to youngster’s obsession for cult fabric. This boom will be fuelled by not only due to an increasing demand from small cities and rural areas, but also because of acceptance of the fabric at workplaces etc. In terms of volumes, the denim market is estimated at 300 mn pairs of jeans, which is projected to grow to 550 mn-600 mn by 2016. India is the second largest denim manufacturer in the world with 1200 MMPA capacity, second to China, which has a capacity of 3497 MMPA. Asia accounts for about 70 % of the global denim fabric production, while the global denim fabric market is $17bn, growing at a modest rate of 3 % to 5 %. The western lifestyle and western fashion has boosted the consumption of casual fashion apparel like denims, dress, shirts, tees, casual shirts among both men and women consumers in all developing countries including India. The average number of denim items owned by Indian consumer is much lower in comparison to consuming market of the United States, Europe etc. The number is even lower than countries like Brazil and China. This difference in the number demonstrates the huge potential that exists for denim in the domestic market. Per capita denim jeans consumption in India is only 0.3 compared to USA’s 9, UK’s 8, Brazil 7, Thailand 7, Japan 6 and China’s 2. The 78 % of Indian population is less than 45 years of age. While denim story started elsewhere in the world as work-wear, it started as a fashion statement of youth in India. It reflected the fashion statement, style quotient and comfort wear anywhere for the youth. With more than 70% of Indian population aging around 26 years and the median age remaining under 30 years even after 10 years, huge potential exist for denim, a fabric with the target Indian age bracket of 14-40 years. Current share of male segment within denim wear is almost 75-80 % with the female gender catching up faster than the growth registered in the male segment. The young generation, either gender, has accepted denim as “normal” wear rather than a “functional” wear. Current domestic market is dominated by metro cities that account for almost two-third of consumption while having got less than 10% of national population. With rising disposable incomes and fashion consciousness, increasing demand from women’s wear segment and the growing acceptance of denim jeans as an office wear coupled with the expanding demand from Tier II & III cities driven by expanding organised retail industry will lead the growth of denim in India. Also NDL has strategic tie-ups with 10 firms for exclusively selling Nandan products around the country and 2/3rd of the orders are confirmed through long term agreements involving minimum yearly quantity commitment. NDL has strong global network of around 15 distributors spread across 8 countries – Peru, Mauritius, Hong Kong, Dubai, Thailand, Bangladesh, New York, Columbia. NDL exports its denim fabric to over 22 countries across the globe through its strong global dealer-distribution network. Merchant exports through various star export houses give an additional boost to exports. Currently, exports constitute over 10 % of total turnover in next three to four years taking benefit from decreasing competitiveness from its Chinese players. As the penetration of denim category and the awareness of denim quality increases in those cities and rural India, their share in market value will start increasing with more number of consumers willing to pay premium for the quality, design and fit. The latest trend in the denim fashion augurs well for the denim companies in India and the Nandan Denim (NDL), which is the second largest manufacturer of denim in India and the 5th largest in the global arena will definitely be the winner in this sector.

Outlook and Valuation:

NANDAN DENIM LTD is India's one of the largest and Asia's 5th leading denium manufacturer. NDL plant is located in Gujarat, which is a textile hub of India, and is known as largest exporter of denim fabric, largest producer of cotton etc. NDL’s plants are with state of art manufacturing facility with latest machinery & technology sourced from across the globe. The machinery is capable of producing wide range of denim fabrics – 100 % cotton, cotton spandex, cotton poly, cotton poly spandex, cotton modal, cotton tencel etc. NDL’s plant in Gujarat gives a close proximity to machinery vendors, fabric dealers and leading garment manufacturer’s which results in faster delivery and services, translating into lower overheads costs. NDL has easy access to the raw material like cotton as Gujarat meets 70 % requirement and provides skilled & unskilled labour. Cotton is the key raw material used for manufacturing denim fabric. It is a seasonal commodity and production is heavily dependent on monsoon. India, under a normal monsoon condition remains a major source of cotton to the national consumers as well as International market. With production of cotton having stabilized around 37 to 38 million bales and domestic consumption to the tune of 30 million bales, the country is prepared to take advantage of any volatility in the commodity market. Any volatility in cotton market impacts the yarn manufacturers the most, whereas the value added manufacturers are reasonably hedged due to the market conditions, i.e. non-commoditised product leveraging the strong agent-based domestic. Cotton prices remained below minimum support price (MSP) in last year. However, it has now stabilised due to intervention of Cotton Corporation of India. China import of cotton is declining and the NDL management does not expect any correction in cotton MSP. It expects cotton prices to remain range bound with decreased volatility. The decline in cotton prices would be beneficial for the company. The company keeps an inventory of 4 months depending on the outlook and trend of cotton prices. NDL is implementing capacity expansion in denim fabric, spinning and shirting segments. The total Capex requirement is of Rs. 612 crore which is funded with a D/E ratio of 2.4:1. Of the total expansion Rs. 250 Cr would be used for spinning, Rs. 250 Cr for denim and balance Rs. 112 Cr for yarn dyeing to be used in shirting manufacturing. The expansion of denim fabric capacity will help the company to increase its domestic market share as well as diversify its operations on a global scale through a rising share of exports, the addition of new shirting capacity will further diversify its operations, and the expansion of spinning capacity will support the increased denim fabric capacity of 110 MMPA. NDL will backward integrate by expanding its spinning capacity from 64 tpd (tonne per day) to 124 tpd over FY15E-FY16E. This backward integration will help NDL to improve operating flexibility by helping the company to absorb the increasing market demand with faster delivery and timely execution due to limited dependency on external factors along the value chain. This will help NDL to achieve optimum capacity utilization and maintain consistency and high quality standards. With the backward integration in place, the average cost of raw materials will stand at Rs. 150/kg as compared to Rs. 170/kg when outsourced from the open which were 10 % to 15 % higher compared to purchase of yarn from market. Integrated facility will help in better management of the working capital and improve the operational efficiencies. Better market response, efficient capacity utilisation and cost savings on captive yarn would result in improvement in EBITDA margin from current 14 % to 15 % to around 19 % to 20 % in the next two years. This backward integration will also result in improved return ratios. Furthermore, with improved operating flexibility, the company would be better placed to increase its share of exports, which have strict quality and timeline requirements. The company envisages increasing its share of exports from 10 % in FY14 to around 30 % by FY18. Overall, this should further help the company to increase its EBITDA margins to more than 20% beyond FY17. The company would get set off of Value Added Tax (VAT) for 8 years post completion of project in March 2016. With the establishment of higher spinning capacity, the cost of fabric is likely to reduce which would lead to better margins and ROCE. The management mentioned that margin improvement is likely to be in the range of 4 % to 5 % due to an advantage of Rs. 12.5 per meter in the cost of fabric by in-house manufacturing of yarn. Debt of the company stood at Rs. 470 Cr at the end of FY15. The management expects its peak debt to be Rs. 650 Cr by FY16E. The company is planning to raise Rs 50 Cr to 100 Cr to part finance the equity portion. It has already passed a Board resolution to raise Rs. 100 Cr through convertible warrants on preferential basis to promoter & non-promoter investors. Post-expansion, the management mentioned that it would consolidate its capacities for one year. Post FY17E, the Textile Upgradation Funds Scheme would expire and the Company would plan its next growth phase post clarity on investment avenues. Free Cash generated through the current expansion plan is likely to be distributed in the form of dividends, in the event of non-finalisation of further investments. Currently, exports contribute 10 % to the topline of the company. NDL exports to 22 Countries in the world; however, more than 80 % of the exports are to Latin America, Africa and Bangladesh. Polo, Target, Calvin Klein are the indirect client of the company, supplied through the wholesalers-distributors export channel. The company plans to increase the share of exports to 25 % in its revenue mix with an aim of diversifying its clientele and de-risk its revenue model. The realisations and margins are almost same in domestic and export market for the current product mix of the company. On financial side revenue of the company has increased at a CAGR of 21.2 % over FY11-15. This was driven by higher volume due to increasing capacities. Shift to higher value added products, backward integration and lower share of traded products in revenue mix enabled the company to improve its EBITDA margin to 15.1 % in FY15 from 13.4 % in FY11. However, debt remains a key negative for the company with leverage of 1.8 x in FY15. This is likely to reach 2.1 times by FY16E. ROE of the company increased to 21.6 % in FY15 from 12.7 % in FY11 while ROCE increased to 15.8 % in FY15 from 10.6 % in FY11. At CMP of Rs. 150.25 the company is trading at 12.52x the FY16E and 10.65x the FY17E. Company can post EPS of Rs. 12.00 in FY16E and Rs. 14.10 for FY17E. The company is on an expansion mode till FY16E which will start showing results from FY17E. It would be the largest manufacturer of denim in the country. It is likely to manufacture shirting with premium quality. Profitability of the company is likely to increase. It is expected the company to grow around 10-15 % in following 2-3 years. It is expected that the company will keep its growth story intact in the coming quarters also and can be a good pick from this sector. 

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)904.101,096.501,241.401,426.30
NET PROFIT (₹ Cr)39.1051.4054.5064.40
EPS ()8.6011.3012.0014.10
PE (x)19.8015.107.005.90
P/BV (x)3.601.501.301.10
EV/EBITDA (x)9.204.505.004.10
ROE (%)19.5021.6019.3019.40
ROCE (%)13.2015.7016.0016.10

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*As the author of this blog I disclose that I do not hold NANDAN DENIM Ltd in my any of the portfolios.


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Sunday, January 3, 2016

SYNGENE INTERNATIONAL LTD: MAKING YOUR PORTFOLIO HEALTHY !!!

Scrip Code: 539268 SYNGENE
CMP:  Rs. 417.70 ; Market Cap: Rs. 8,354.00 Cr; 52 Week High/Low: Rs. 402.00 / Rs. 250.00
Total Shares: 20,00,00,000 shares; Promoters : 14,90,92,154 shares – 74.55 %; Total Public holding : 5,09,07,846 shares – 25.45 %; Book Value: Rs. 42.29; Face Value: Rs. 10.00; EPS: Rs. 9.81; Dividend: 00.00 %; P/E: 42.57 times; Ind. P/E: 27.37; EV/EBITDA: 29.10x
Total Debt: Rs. 155.00 Cr; Enterprise Value: Rs. 8,509 Cr.

SYNGENE INTERNATIONAL Limited: The Company was founded on November 18, 1993 and is headquartered in Bengaluru, India. It is a subsidiary of Biocon Limited, a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. The company was earlier known as Syngene International Private Ltd and changed its name to Syngene International Ltd on March 26, 2007. The company came out with an IPO on July 27, 2015 offering 2,20,00,000 equity shares of Rs. 10 each for Rs. 250 per share raising Rs. 550 Cr. The shares of the company got listed on August 11, 2015 at Rs. 295 making a high of Rs. 310.40 on listing day. The object of offer for sale was to achieve the benefits of listing and enhancing visibility and brand image among existing and potential clients and to provide liquidity to the existing shareholders. Syngene International is India-based contract research organisations (CRO), 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. Their services in discovery and development cover multiple domains across small molecules, large molecules, Antibody-Drug Conjugates and oligonucleotides. Syngene offers customized models as per their client’s requirements. These offerings range from a Full-Time Equivalent to a Fee-For-Service model, or a combination thereof. It also offers discovery chemistry services, including medicinal chemistry, synthetic chemistry, library synthesis, biomolecules, computational chemistry and organic electronic materials, and discovery biology services in the areas of recombinant deoxyribonucleic acid (DNA) engineering, cell line development, hybridoma technology, protein sciences, screening and assay biology, in vivo pharmacology, toxicology and biologicals. The Company also offers safety assessment, large molecule development, chemical development, formulation development, polymer research, integrated discovery and development, and clinical development services. Till Dec 31, 2014, they serviced 195 clients, ranging from multinational corporations to start-ups, including seven of the top 10 global pharmaceutical companies by sales for 2014. Company's long term clients include global healthcare organisations Bristol-Myers Squibb Co. ("BMS"), Abbott Laboratories (Singapore) Pte. Ltd. ("Abbott") and Baxter International Inc. ("Baxter"). Syngene International Ltd is locally compared to Vimta Labs Ltd, Transgene Biotek Ltd, Saamya Biotech (India) Ltd, Veerhealth Care Ltd, Ashco Niulab Industries, Mavens Biotech Ltd, Piramal Phytocare Ltd, ABL Bio Technologies Ltd, RJ Biotech ltd, Biocon Ltd, Siro Clinpharm, GVK Bio, Clininvent, CliniRX, Ecron Acunova and globally with Quintiles Transnational INC of USA, Parexcel International of USA, Pharmaceutical Product Development LLC of USA, Covance Inc of USA, Medpace of USA, PRA Health Sciences of USA, inVentive health Incorporated of USA, Chiltern International of USA, ICON Plc of USA, Quotient Bioresearch USA, Takara Bio Inc of Japan, Morishita Jintan Co Ltd of Japan, Shin Nippon Biomedical Laboratories Ltd, Japan, EPS Corp of Japan .   

Investment Rationale:
 SYNGENE INTERNATIONAL LTD is the subsidiary of pharmaceutical major Biocon. It is an internally reputed contract research and manufacturing organization with multidisciplinary skills in chemistry and biology services. It caters to the outsourced research requirements of global pharmaceutical, biotechnology, agrochemical, consumer health, animal health, cosmetic and nutrition companies on a fee-based contractual arrangement. SIL provides a gamut of integrated, end-to-end services to develop novel molecular entities (NMEs) or new drugs. In this process, it works with customers to conduct discovery from target identification to candidate selection , development including pre-clinical and clinical studies, analytical and bio-analytical evaluation, formulation development and stability studies and pilot manufacturing like scale-up, pre-clinical and clinical supplies under one roof. SIL has a client base of 221 overseas customers including large global pharma players like Bristol–Myers Squibb, Abbott and Baxter among others. The company has a team of talented 2,122 scientists including 258 PhDs. It owns a Laboratory and pilot manufacturing facility which is spread over 9,00,000 sq. ft located in Bengaluru. Syngene has state-of-the-art research facilities certified with ISO 9001:2008, ISO 14001:2004, and OHSAS 18001:2007. Its animal facilities are GLP certified by the Indian authorities and AAALAC accredited. Over the last 20 years, Syngene have successfully offered these services to more than 220 clients including start-up companies, large pharma-biotech, agrochemical, chemical, nutrition and animal health companies in the USA, Europe and Asia Pacific including Japan. Syngene has a strong corporate governance framework with a focus on client satisfaction, quality, safety, ethics and integrity. Their ability is to deliver significant value to its customers by leveraging their scientific skills, global mind set and India’s cost competiveness differentiates Syngene as one of the most preferred partners. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsource more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. Contract research organisations (CROs) services span the range of R&D activities from new molecular entity (NME) discovery, development to manufacturing. The growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. The global CRO market for discovery services was estimated at US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5 %, according to one report. The global CRO market for development services was estimated at US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014-18) of 11.6 %, according to the Frost & Sullivan Report. As an industry, CROs have expanded their service offerings over time to meet growing needs for full-service outsourcing across the full spectrum of R&D and related activities. In practice, however, most CRO service providers Specialise to some degree based on the needs of their clients and the market in which they operate. A significant portion of R&D budgets are spent on outsourcing services domestically and international which are offered by the CRO industry. This was approximately $25 billion in 2015. As of 2015, this figure is expected to grow at 9 % over the next ten to fifteen years. There are over 1,100 CROs in the world, despite continued trends toward consolidation many CROs are being acquired in recent times or others go out of business. It is a very fragmented industry with the top 10 controlling almost 55 % of the market in 2009. Global pharmaceutical players are facing structural issues such as profit pressures arising from impending patent cliff, drying product pipeline and rising R&D costs. Surprisingly, the new product approvals from the USFDA are on the rise. Hence to maintain the cost balance at one end and maintain the new product introduction at the other, these players are inclined to outsource some of the R&D budget to CROs like Syngene. Also, the need for greater flexibility has reduced the willingness of these players to incur large fixed costs associated with large scale R&D programmes. Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene enjoys high recall value, which is reflected in the fact that eight out of top 10 clients have been engaged with the company for the past five years. The number of clients for company has increased from 111 in FY11 to 221 in FY15. However, the amount of business from 211 customers is only 30 % as of now. This may be due to low amount of outsourcing to Syngene at this stage. The scope of work may increase depending on the service provided by Syngene going forward. The company currently conducts laboratory and manufacturing activities at two primary facilities-Bommansandra, Bengaluru Bommansandra Industrial Area, Bengaluru. Apart from this, it is in the process of establishing a new commercial scale Facility in Mengaluru (SEZ) to manufacture novel small molecules for innovator companies in pharmaceutical, agrochemical and other industrial sectors. Syngene plans to build on the success in integrated services to “follow” their clients’ molecules across discovery, development and manufacturing. Syngene is well-positioned as a one-stop shop for their clients to advance the R&D programmes from the discovery stage through preclinical and clinical trials and, with the new planned manufacturing facilities to support them through the commercialisation process. Strong team and management along with the strong brand recall value a key strength for Syngene and cost effectiveness will help Syngene retain its market share, looking forwards these factors will help the growth of Syngene and most preferred pick from this sector.

Outlook and Valuation:
Syngene International Ltd. is a subsidiary of Biocon, an India's largest and Asia's leading biotechnology company with a strategic focus on biopharmaceuticals and research services. Syngene was incorporated in 1993 and is headquartered in Bengaluru, India. The company has now become one of the leading India-based Contract Research Organisations (CRO), offering a suite of integrated, end-to-end discovery and development services for Novel Molecular Entities (NMEs) across various industries including biotechnology, pharmaceutical, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Syngene has the world class infrastructure. Their laboratory and manufacturing facilities are of high standards as required by the regulatory compliance and are consistent with the requirements of the large global clients. This provides the sustainable competitive advantage to Syngene. Their research facilities and systems are certified with ISO standards. The pre-clinical research facilities are certified with Good Laboratory Practices (“GLP”) certificates and accredited by Association for Assessment and Accreditation of Laboratory Animal Care (“AAALAC”). The clinical facilities are GLP compliant, National Accreditation Board for Testing and Calibration Laboratories (“NABL”), College of American Pathologists (“CAP”) and Central Drugs Standard Control Organisation (“CDSCO”) accredited and have undergone multiple FDA audits. In 2014, they successfully completed an FDA pre-approval inspection of one of their manufacturing facilities. In 2010 and 2013, they also successfully completed EMA audits of their bioanalytical and clinical facilities. Contract Research And Manufacturing Services (CRAMS) organizations provide outsourced services to support discovery and development for R&D driven organisations across various industries like biotechnology, pharmaceuticals, biopharmaceuticals, nutraceuticals, animal health, agro-chemicals, cosmetics and electronics. CRAMS service providers will typically compete in various segments of Discovery, Development and Manufacturing. Global R&D expenditure for the pharmaceutical industry in 2014 was approximately $139 billion, of which $105 billion could have potentially been outsourced. The outsourcing market for discovery, pre‐clinical and clinical segment was stood at around US$43.5 billion by 2014 and is expected to grow at CAGR of 11.5 % to US$67.2 billion by 2018. Geographically, North America and Europe together accounts for around 75 % of the total global outsourcing business. Syngene intends to evolve itself from a CRO based to a Contract Research and Manufacturing Services (“CRAMS”) based organisation with commercial-scale manufacturing capabilities. This can help Syngene to leverage their existing relationships with clients and provide them with forward integration on the discovery and development continuum. Syngene currently manufactures developmental batches of small and large molecules to support clinical trials for multiple clients. In the area of small molecules, it has multiple client-programmes that are in late-stage clinical development. Syngene recently entered into three long-term contracts with two existing clients for commercial manufacturing of their novel small molecules. Currently, one of these molecules is under late stage development, while the other two are at various stages of clinical development. In addition to these contracts, Syngene is also working on attracting new clients for commercial manufacturing opportunities, which will be the key growth driver for the company. Global CRAMS market grew by 15-16 % CAGR over 2010-2015, while Indian CRAMS market during the same period increased by 25-30 % CAGR. Going forward, the Indian CRAMS industry is expected to increase approximately to US$18 billion in 2018 from about US$7.6-7.8 billion in 2013, registering 18-20 % CAGR. The growth would be mostly led by increase in strategic alliances and expanding footprints to major geographies through strategic partnership. The growth rate for Indian CRAMS players slowed down to 5-8 % CAGR during 2009-2011. The industry underwent tough times on account of inventory rationalization and reduction in Research and Development (R&D) budget by multinational pharma companies in the face of global slowdown. Amid slowdown, CRAMS players also faced rising cost pressures, especially with new products not being launched in the market. The cost of developing new drugs is estimated to have reached approximately US$5 billion. However, the growth rate gradually picked up to low double digits in subsequent years. Going forward, it is expected that there could be gradual improvement with expected CAGR 18-20 % on the back of recovery signs witnessed in US markets. Further, global pharma companies are slated to enhance their allocations towards R&D in order to increase their drug pipeline. Increase in fresh orders and new assignments will aid in revival of CRAMS business. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsources more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. Syngene’s expansion plans are well on track to boost the next leg of growth. Syngene plans to spend around $200 million over the next three to four years for setting up a new facility and expansion of existing facility. It has commenced the process of establishing a new commercial facility in Mangaluru to manufacture novel small molecules for innovator companies. It has also expanded its current small molecule manufacturing facilities in Bengaluru to meet the interim manufacturing needs of its clients. Additionally, it is in the process of expanding its large molecule manufacturing Capabilities by establishing a new unit in Bengaluru. Syngene derives 95 % of the revenues from exports. In terms of classification on contractual basis, it derives 36 % of the revenues from long term dedicated contracts with a Contractual commitment of five years and more. The company offers a dedicated, customised and ring-fenced infrastructure in line with client’s requirements. These dedicated centres are generally multi-disciplinary, full time engagements that support the R&D requirements of our clients. The remaining 64 % come from full time equipment (FTE) and fee for service (FFS) contracts. In FTE contracts, the company does billing based on the number of scientists deployed. In this case there is an agreement with the clients for a minimum utilisation of a specified number of scientists dedicated to their work. The scope of services and deliverables under FTE contracts generally evolves over time. The FTE contracts are generally renewable annually. FFS contracts are short-term in nature. In FFS contracts, the agreement is for fixed price for agreed services within a defined scope. Syngene International has financial stability and steady operational cash flows to enable the extension of platforms in line with the present and future needs of clientele. Further, long-term collaborations with certain clients lead to predictable and stable cash flows. The company has strong balance sheet, well adequate to support their new molecular entity (NME) development with dedicated investments in terms of both capabilities and capacities. Syngene’s leverage free balance sheet with sustainable cash flows the net debt/equity (net D/E) has reduced to nil in FY15 from 0.6x in FY11. Also, in the past five years it has generated cumulative free cash flow of Rs. 200 crore post incurring capex on capacity expansions, technological up gradations and maintenance. The major capex incurred in past three years was to develop a dedicated facility for its clients abbott and Baxter. Over the next three years, the company is planning around US$200 million capex towards capacity augmentation in its laboratory services, developmental services and GMP drug substance manufacturing. 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. 8.75 respectively. At the current market price of Rs. 405.30, the stock is trading at 38.89 x for FY16E and at 31.05 x for FY17E. Company can pst Earnings per share (EPS) of Rs. 10.42 for FY16E & for FY17E it could be seen at Rs. 13.05. It is expected that the company will keep its growth story intact in the coming quarters also and can be a good pick from this CRO sector. 

KEY FINANCIALSFY15FY16EFY17EFY18E
SALES ( Crs)859.901,025.101,222.20 1,531.10
NET PROFIT (₹ Cr)175.00208.50 261.10332.60
EPS ()8.7510.4213.0516.63
PE (x)40.0033.6026.8021.00
P/BV (x)8.307.106.005.00
EV/EBITDA (x) 16.70 21.61 18.11 14.39
ROE (%)20.7021.0022.2023.60
ROCE (%)19.5020.8022.5024.40

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*As the author of this blog I disclose that I do not hold SYNGENE INTERNATIONAL LTD in my any of the portfolios.


*Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

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Thursday, December 31, 2015

WISHING YOU ALL A VERY HAPPY NEW YEAR 2016 !!!

HAPPY NEW YEAR 2016 !!!




   HELLO FRIENDS, 
WISHING YOU AND YOUR LOVED ONES A VERY  
                             
 HAPPY NEW YEAR 2016 !!!

!!! Write it on your heart that every day is the best day in the year. New is the year, New are the hopes, New is the resolution, New are the spirits, and New are my warm wishes just for you. Have a promising and fulfilling New Year  2016 !!!

I Thank you all for being a regular royal reader of BHAVIKK SHAH's BLOG. I Thank you all for your unconditional support towards me, Your such priceless support, inspires me to work better towards the betterment of my investor friends. Its been a great year with you guys. It's been a pleasure discussing stocks and sharing views on topics like stocks or economics or politics... and ofcourse some new topics like shot stories too :)  

Its been a wonderful year gone by, with my ROCE presentation crossing 2900 views on Author Stream ; with ur support the blog posts crossed more than 338 posts with more than 7,92,669 pageviews and proud to have 528 followers and counting on the blog.....

With such, I still believe its long way to go and I again thank you all for your unconditional support and do continue to pour in ur valuable backing...I take ur support as an moral responsibility and it will be my endeavour to be at my best and to bring best fundamental stocks on board....

 I look forward to serving you better all again in 2016, I wish you all Peace, Happiness, prosperity and Good health in coming new year !!!

ONCE AGAIN WISHING YOU ALL A VERY VERY

HAPPY NEW YEAR 2016 !!!


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Best Regards,
BHAVIKK SHAH 

*Reader Friends, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Best Regards,

BHAVIKK SHAH  
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