Suven Pharmaceuticals

Market Capitalization: 9,224 Cr	Current Price:  362 (14 Sep 2020)
Stock P/E: 29.1	Debt to equity: 0.24
Sales Growth (2Yrs): 15.5%	Profit Growth (2Yrs): 41.6%
ROCE: 46.2%	ROE: 39.7%
Promoter holding: 60%	Cash Cycle: 81 days
Asset Turnover: 1.12	Net Profit Margin: 36.2%

ABOUT THE COMPANY

Suven Pharmaceuticals Ltd (SPL) demerged away from Suven Life Sciences in 2018 and was listed on 9th March 2020. Suven Pharmaceuticals is an integrated CDMO player with strong capabilities in process research, custom synthesis, formulation development analytical and services. On other hand, Suven Life Sciences specialises in discovery research and clinical development of new molecules focused on Central Nervous System (CNS) disorders. The Business model post demerger will focus on Contract Development and Manufacturing Operations (CDMO) with three business segments namely CRAMS, Speciality Chemicals & Formulations.

BUSINESS PROSPECTS

Overhang of Supporting LifeSciences Business Gone

As part of the combined entity, Suven Pharma was kind of the cash cow whose earnings was ploughed into the long gestation and unpredictable life sciences division. Historically, the issue with the combined entity was that CRAMS and Speciality Chemicals were cash generating business with high margins and cash from this segment was used to fund research and clinical trials for molecules like Suvn 502 etc. However, post the demerger, SPL is well poised for growth with renewed focus on the CDMO Business. R&D costs will be nominal and hence the business will look to maintain impressive EBITDA margins of 40%+ with decent cash generation. Despite pandemic and high base, the company has guided 10-15% growth in revenues and around 20% CAGR in profits based on strong order book position. SPL can now focus on strong execution capability and focused approach without the burden of success or failures in the Lifesciences division.

‘Rising Pharma’ Acquisition Strategically Important

In FY19, SPL purchased a 25% stake in Rising Pharma Inc, a U.S based generic pharma company, through its subsidiary for INR262 crore. Rising Pharma is a development cum distribution company with more than 100 ANDA’s under their belt with various customers. Suven will be the preferred partner for them with first right of refusal. This suits SPL as the revenue can accrue in CRAMS side if development takes place and approval comes in gives the company leverage to expand its CRAMS business. Rising Pharma had filed for bankruptcy when it received SPL’s bid. Since then, Rising Pharma has seen a turn around and this in-turn contributed INR48 crore as SPL’s share of profits in FY20 which means SPL paid only 5 times profits for acquiring it in FY19. Strategically as well, this acquisition is important as it can use ‘Rising Pharma’ to market the company’s ANDA’s in the U.S and give SPL a platform to expand its reach in U.S.

Intermediates to API to Formulations

The Covid-19 outbreak has halted the progress of new projects in Q1. However, the company is amid a major capex of INR 320 crore. Of this, SPL has already incurred INR 230 crore and expects to spend another INR 90 crore over the next 6 months until FY21. In the Speciality Chemicals business, SPL has two molecules. The company is on track for launching two more new molecules and one is expected to be commercialized in FY21. These molecules could have expected revenue potential of around INR 150 cr. 90% of the speciality chemical molecules will be in the agro chemical sector and these are patent protected. Speciality Chemical business margins are lower compared to Base and Commercial CRAMS. Commercial CRAMS is high value high margin business where it provides molecules related to Arthritis, Diabetes, Depression and Women’s Health.  Last but not least, SPL is firing up its formulation business with 11 ANDA filings (3 belongs to Suven, 6 to customers, 2 new animal drug for customer). It has started with 2 supplies and will start one more by end of this financial year. The company expects to file 5 more within 12-18 months.

The company saw strong execution of existing projects in the CRAMS segment during the quarter and stated that they are currently working on 60-70 active projects across 40 customers. SPL has long term contracts with these customers based on certain quality parameters. Although the company has not undertaken any new projects in the last two quarters, SPL is confident that new projects will come through from Q3 FY21 onwards. In the long term, SPL will look to move from intermediate CRAMS to API CRAMS, which would give incremental value addition.

As shown in the graph below, formulations are currently a small pie of the overall revenue. However, going forward formulation’s vertical could be next growth driver owing to the consistent number of ANDA filings planned per year. Each molecule could add around INR 14-28 crore to the bottom line as the company works on profit sharing model in this space. It is going to target formulations in niche space which are low volume and high value plays.

	FY18	FY19	FY20
CRAMS	67.8%	59.5%	55.2%
Speciality Chemicals	25.1%	32.9%	36.5%
Formulations and Technical Services	7.2%	7.6%	8.4%

KEY RISKS

• SPL owes INR 115 cr to Suven Lifesciences which has been taken as a loan. It will pay INR 41 cr in FY 21 and rest in another 12-18 months.
• SPL is still being managed by Mr. Venkat Jasti who is also managing Suven Lifesciences. It is yet to appoint a professional senior management with complete focus on SPL.
• Formulation business profitability could see long lead times.
• About ten customers provide 90% of its business. Off course, this might change in the future
• Lumpiness in revenues in CRAMS and Speciality Chemicals.

KEY POSITIVES

• Integrated CDMO player with presence across all verticals – intermediates, API’s, formulations.
• 90% of its revenues is from Regulated markets.
• One of the best margins in the industry – EBITDA margins of around 45%
• Capex phase nearing its end and well placed to monetize the huge opportunity in CRAMS space.
• Repeat business owing to long standing relationships with MNC companies
• Working with innovator companies in developed markets having stringent regulations.
• Board of Directors have approved a 1:1 Bonus issue.

BUSINESS OUTLOOK AND VALUATION

Suven Pharmaceuticals is attractively priced at PE of 29 with more attractive return ratios compared to its peers like Syngene or Divi’s. However, it is not well established like some of its peers and this explains the valuation difference. SPL is led by a professional management with strong pedigree and is well positioned for next phase of growth in all three verticals of Speciality Chemicals, CRAMS and Formulations. The company is commercializing a specialised facility in Vizag to manufacture advanced API’s and expects revenue growth of 10-15% and bottom line growth of 20% for next couple of years.

Disclaimer: Have personal investments in Suven Pharmaceuticals at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.