Syngene reported weak results with revenues down 12% y-o-y. Management indicated that this was largely due to a fire at a key facility in December. Guidance though was positive and it expects growth to improve to 15-20% in FY18. The firm added 35+ new clients including a key biologics contract. While Syngene is well placed to benefit from R&D outsourcing, a premium valuation and slow near-term growth limit upside. Retain ‘Hold’.
Syngene reported significantly weak results with revenues and EBITDA 20% below expectations. Revenues declined 12% y-o-y. Margins though were 90 bps better than expected led by cost control and forex gains. The disappointment was driven largely by the fire at the discovery chemistry facility of the company. Higher other income led to flat profit after tax y-o-y. Syngene’s client base increased to 293 in FY17 from 256 in FY16. The key positive in the quarter was in the biologics business. It signed an agreement with a Canadian biotechnology company for development and manufacturing of five novel antibodies. This is the second strategic contract since the fire indicating no major long-term impact from a client perspective.
Management commentary on growth going forward was positive. Management indicated that they expect growth to revert to 15-20% in FY18, led by biologics, bio-informatics and formulation manufacturing. Margins though will see 200 bps impact in FY18 due to investment in safety and compliance. On forex, the company has hedged FY18 and most of FY19 revenues, which should aid earnings.
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While Syngene is, in our view, best placed to capture increased market share and benefit from increased global CRO spending, near-term growth may be slow. Given the currency and capacity constraints, we expect revenue growth in FY18 to be 18% and margins to decline 250 bps.We adjust our estimates for the quarter. We also change our currency assumptions to 66/68 for FY18/19. Our FY18/19 EPS falls by 15-13%.
While Syngene has strong medium-term growth drivers, the stock is trading at 38x FY18 PE, a 65% premium to sector. Given the near-term challenges led by capacity constraints and client attrition, we see limited room for multiple expansion. Retain Hold with revised TP of Rs 520, implying FY19 PE of 29x. Risks: Client concentration and pricing power.