Syngene tests investor appetite for IPO

Parent Biocon hopes the CRO's strong growth profile and expansion plans will mitigate recent downturn in the Indian equity market

Indian pharma company Biocon has begun pre-marketing an initial public offering of its clinical research arm, Syngene, with a target fundraising of $100 million to $150 million. 

The group hopes the unit's strong growth profile will overcome investors' negativity towards the Indian stock market, which has been on a downturn since late January. After an extremely strong rally following the election of Narendra Modi last spring, the BSE Sensex topped out on January 29 and has fallen 8% since then. 

However, Indian IPO's take time to wend their way to market, which means sentiment could be very different by the time Syngene finally prices in August.  According to a termsheet seen by FinanceAsia, management will set off on formal roadshows around June 8, with the retail offering scheduled for mid-July and listing in August. 

Biocon hopes to divest an 11% stake in the group's enlarged share capital through a 22 million secondary share deal. Qualified Institutional Buyers (QIB) will be allocated at least 50%, with retail on a minimum 35%. 

Biocon shareholders will be entitled to apply for two million shares of the total. 

Bookrunners for the IPO are Axis Capital, Credit Suisse and Jefferies. 

Valuation

Indian regulators do not allow investment banks to release forward-looking valuations during an IPO's pre-marketing stage. But the deal does have one data point since the India Value Fund purchased a 10% stake for $62 million last September, valuing the company at $620 million.

The private group purchased the stake on a forward EV/Ebitda multiple of 14.5 times. 

The valuation inflation since then will have been driven by Syngene’s strong growth profile. Ebitda has grown by Compound Annual Growth Rate (CAGR) of 30.8% over the past three full financial years. 

In the nine months to December 2014, it amounted to Rs2,071 million ($32.64 million). And one reason why the company is keen to be listed separately is so it can make its capital structure more efficient.

It currently has just Rs1,830 million ($17 million) in short-term borrowings equating to a debt to Ebitda ratio of just 0.88 times. Additional debt will help the group to succeed in a plan to transform itself from being a pure Contract Research Organization (CRO) to a Contract Research and Manufacturing Organization (CRAM).

This means that instead of simply providing discovery and development services for the world's big pharmaceutical companies, it will also start commercially producing molecules for them as well. 

In doing so, it is planning a capex outlay of about $200 million over the next three years, a big increase over the amount it has spent in the past decade. One key consideration for investors will be how much execution risk this is likely to entail.

The group currently has a roster of 195 clients including seven of the world's top 10 global pharma companies. In particular, it has long term agreements with three: Bristol-Myers Squibb, Abbott Laboratories and Baxter International.

About 39% of its revenues were derived from long-term contracts and more than 90% of revenues were attributable to international clients. In the nine months to December 2014, total revenues amounted to Rs6,175 million ($97.33 million). 

According to Frost and Sullivan the global CRO sector is worth about $139 billion. It expects outsourcing to expand to about 38.7% of the total by 2019 up from 27.3% in 2014 and India is likely to be a big beneficiary because of its lower cost base.

Comparables

Syngene’s nearest domestic comparable is India’s Divis Laboratories, which is currently trading on a forward p/e ratio of 16.5 times. Year-to-date, the stock is up 4.6%, but a much stronger 38.3% on a one-year basis. 

Divis is also a CRAM. For its financial year ended March 2015 it reported Ebitda of Rs11,609 million ($183 million), representing an Ebitda margin of 38% compared to Syngene's 32%. 

Crucially, Syngene does not expect its own margins to come under pressure as it scales up its manufacturing business according to one source close to the deal. 

A second comparable is WuXi PharmaTech, which is listed on the New York Stock Exchange and currently trading at 24.8 consensus 2015 earnings. However, the group is in the process of de-listing. 

Bangalore-based Biocon hopes the Syngene IPO will unlock value, release funds for its own capex and help give its own share price a stronger tailwind. Over the past year, it has underperformed the market, falling 18.8% since a July 4 peak share price of Rs543.5.

India’s largest generic insulin manufacturer is currently trading on a consensus forward p/e ratio of 19.55 times.

One source close to the deal said that while Biocon and Syngene had the same founder and share office space, the two operate as different companies with separate management teams. Syngene leases its office space from Biocon.

This suggests that Biocon could well progressively sell down its stake in the coming years. As such the IPO will have a three-year lock up for 20% of its post IPO stake and a one-year lock up for the rest.

Market upswing

In a recent research report Morgan Stanley suggested that India has become Asia’s most oversold market on two out of three technical factors in its model.

This sell-off has been driven by a number of factors including poor earnings results, slower than expected rate cuts by the central bank, a lack of clarity on key legislative bills and commodity price falls. Unexpected tax demand issuance (Minimum Alternate Tax) to foreign portfolio investors on their capital gains has also been hanging over the market.

However, the US investment bank believes that investors who missed the post election rally may now be able to find a good entry point.

“We believe the current valuation for India looks attractive with 12 month forward p/e relative to EM at a 35% premium compared to 58% at the peak in January,” it wrote. “This is the lowest forward relative since November 2013.”

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