Suven Life Sci
BSE ID : 530239 NSE ID : SUVEN
RECOMMENDED PRICE 162.95
PEAK FROM RECO 337.70 107.24%
CURRENT PRICE 22.35 86.28%
We value the stock at 28x FY19 EPS of Rs.7.90 arriving at a target price of Rs 220 representing 35% potential upside.
Suven Life Sciences
Founded by Dr. Venkat Jasti in 1989, the company commenced its operations as a manufacturer of pharmaceutical ingredients and soon expanded into manufacturing and export of fine chemical intermediates.
Strong pipeline of CRAMS projects provides long term visibility:
The company at the end of Q2FY17, has 115 active CRAMS projects of which 71 projects are in Phase?1, 42 projects are in Phase?2, 2 projects are in Phase?3, and another 3 projects have reached the commercial phase. The Management expects this segment to grow at 10?15% for FY17 and FY18 without considering any positive surprises of success with the customers' molecule. Since, the company caters to NCE based CRAMS, the Management expects margins to sustain broadly in the long?run.
Strong financials provides cushion for further investments and expenditure:
The company spends usually more than 10% of the revenue towards research and development which takes away a chunk of their profits. The good part is that the R&D expenditure is expensed out on a run?time basis leaving no stress on the balance sheet. Further, the borrowings remain at quite low level of Rs.66 crore including the short?term working capital requirement – and the debt?equity ratio stands at 0.1x leaving a wide window, in case, if the company needs to spend on any of their verticals. Furthermore, the company has nearly Rs.250 cr cash which the company had raised to fund its research expenses to be incurred on SUVN?502.
SUVN?502 – A bet for a bonanza:
The current market size of Alzheimer’s disease which stands at $10 bn is likely to triple by 2022 in USA. Molecules similar to SUVN?502 like Lu AE58054 (Lundbeck, Otsuka) July, 2013 which is currently ongoing Phase? 3 had received $150 mn upfront for phase?2 program. Another, RVT?101 (GSK, Axovant) December, 2014 was bought post PoC from GSK for $5 mn plus future milestone payments and sales royalties. Raised $362 Mn in June, 2015. It is also currently ongoing Phase?3.
OUTLOOK & VALUATION
Suven Life Sciences has a fundamentally strong business model targeting the niche at the top of the pyramid – the CRAMS division which engages contract research rather than contract manufacturing and thus commands better margins unlike other CRAMS players. The long established relationships with over a score of global pharma giants and a robust pipeline of projects provides a good long?term business visibility. Additionally, the proprietary NCEs which includes promising molecules – SUVN? 502, SUVN?G3031, SUVN?D4010 presents huge opportunity value. Furthermore, the strong financial position ? low debt?equity ratio, of 0.1x, cash worth Rs.241 crore on balance sheet, visibility of stable revenue for the next couple of years with healthy profitability followed by substantial price correction presents an opportunity to re?enter the stock with long?term horizon. We value the stock at 28x FY19 EPS of Rs.7.90 arriving at a target price of Rs.220 representing 35% potential upside.
For the half year ended September 30, 2016, the top line stood at Rs.249 cr, representing a growth of 14.1% YoY and an EBITDA margin of 32.3% (post R&D) and 44.1% (pre R&D). The company has reported a net profit of Rs.59 cr in H1 FY17 as compared to Rs.46 cr in H1 FY16, a jump of 29.1% YoY. The EPS stands at Rs.4.65 on standalone basis as against Rs.3.60 in the first half of previous fiscal.
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Analyst Stock Ownership No
Stock Recommended to Clients Yes
Remuneration/Benefits received from company in 12 months No
Merchant Banking Market Making activities / projects No
Sushil Financial Services Pvt. Ltd and Group Companies Holding Yes
Sushil Financial Services Pvt. Ltd and Group Directors Holding Yes
Broking Relationship with the company covered No
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