INVESTMENT RESEARCH FUNDAMENTAL COVERAGE - SEQUENT SCIENTIFIC LIMITED. Future Strategy

Transcription

1 Future Strategy INVESTMENT RESEARCH Dated : 09th Nov Price ` 100 Fair Value 130 Upside 30% Div Yield - Tenure 1 YEAR Sensex Nifty Group/Index B / S&P BSE 500 M.cap (` in cr) 2438 Equity (` In cr) wk H/L ` 147/65 Face Value ` 2.00 NSE code BUY Stock Details SEQUENT BSE code FUNDAMENTAL COVERAGE - SEQUENT SCIENTIFIC LIMITED Rationale behind hiving off Human API Investment Rationale DEMERGER - Focus on value creation in Animal Healthcare (Alivira) - ROBUST GROWTH In order to have better management and clear focus of its business activities, BOD approved a draft Composite Scheme for De-merger of Human API business of SeQuent and Commodity API business of Strides Shasun Limited to Solara Active Pharma Sciences Limited (Solara). Commodity API business & Human API business, being B2B businesses, require a differentiated strategy and direction to grow and deliver value. The Human API business which though profitable, will require significant CapEx to build scale and exigencies While the differentiated business model of focusing on old, small volume molecules make the business highly profitable, with annualized revenue of ` 300 crores, the business is sub-scale Segregation of Human API Business from animal healthcare business of Sequent will allow concentrated focus by SOLARA management on the Human API business & SEQUENT management on animal healthcare business. Key Valuation Ratios RONW 3% P/E 77 P/BV 2.4 EV/EBIDTA(TTM) IN ` Key Financial Data EV (`in cr) BV (`in cr) NW(`in cr) EPS (TTM) 1.30 The unbundling of Commodity API Business & Human API Business and consolidation into SOLARA will create an active pharmaceutical ingredients company in India with critical size, and is expected to unlock value by enabling the business activities to be carried out with greater focus and specialization for sustained growth. Demerger of the Human API Business into Solara Active Pharma Sciences Limited which will also house the Commodity API Business of Strides Shasun Limited, will help achieve critical scale & size and emerge as one of the largest API companies from India. This decision, to part with the business from Sequent was taken considering the dynamic regulatory landscape in API industry along with the growing opportunities for a pure-play API player from India. The demerger awaits the final nod from the National Company Law Tribunal, Mumbai, and will be value accretive for its shareholder. Share Holding Pattern Promoter Others 43% 57% Corporate Governance Transparency Ratio's Year End Tax Rate % 2.50 (18.60) (40.50) (0.53) Receivable day Div. Payout % Source: Google Page 1

2 Business Highlights- Q2 FY 18 Alivira Formulations Business grew significantly YoY with Europe growing by 10%, Brazil by 54% and Turkey by 50% Established Alivira presence in France, with the largest EU market size of over $1.5Bn. First commercial sale expected in 1Q19 2 products launched across 4 EU countries Front end team in place in Ukraine with one of the largest egg producer in Europe. Recorded first commercial sale in the current quarter API VET business grew by 9% YoY US market: To gain momentum with commercialization of key APIs in H2FY18 Regulatory Filings and approvals Filed 1 CEP from Vizag USFDA plant, resulting in a total of 6 filings as on date Filed 2 products in EU and 14 products in emerging markets, resulting in 109 registrations in EU and 120+ registrations in EM Received 16 product registrations in emerging markets during this quarter Human Health Human health business grew by 23% during the quarter Growth driven by a robust portfolio of 32 products with 28 USDMF, 11 CEPs and 10 WHO filings GROWTH DRIVERS: Increase in domestic demand: Growth in middle class population with increase in awareness levels, rising per capita Income, change in lifestyle due to urbanization and increase in literacy levels, demand for advanced medical treatment is expected to rise. Rise in outsourcing activities: Increase in the outsourcing business to India for generics, CRAMS, Clinical Data Management, research activities would drive growth of the Indian Pharmaceutical Industry. Growth in healthcare financing: Introduction of products such as health insurance policy, life insurance policy and cashless claims has resulted in increase in healthcare spending, which in turn will benefit the pharmaceutical industry. Demand from emerging segments: Some of the emerging segments such as contract research and development, biopharma, clinical trials, bio-generics and pharma packaging are expected to drive growth of the Indian pharmaceutical industry. RESULTS ANALYSIS:- Company has clocked robust revenue and record growth in profitability during Q2FY18, demonstrates the successful outcome of strategies that embarked upon few years back. On business front, Alivira now contributes to over 65% of the consolidated revenues. Geographically, Europe has contributed to more than 50% of the Alivira business and with the recent US FDA approval for its Vizag facility, company expect the US business to ramp up exponentially. Additionally, company also gaining sustainable traction in Brazilian and Turkish business Page 2

3 Quarterly & Yearly Results Analysis RUDRA SHARES & Graphical presentation Q2FY & Six Months Results: Particulars Revenue EBITDA EBITDA % PBT PBT% PAT PAT % EPS Results Snapshot ` in crores Quarter Ended % Change % Change Six Months Ended Q2 FY 18 Q1 FY 18 Q2 FY 17 (Q-O-Q) (Y-O-Y) Sep-17 Sep-16 % Change % 17.16% % % 90.68% % 15.98% 13.79% 9.82% % 9.33% % % % 6.38% 4.17% -0.90% % -2.34% % % % 4.93% 3.42% -1.92% % -3.05% % % % Company Overview SeQuent is looking towards the future with courage and confidence, because of the critical role it can play to help make a difference in global economic progress and social wellbeing. Ever since inception in 2002 SeQuent has emerged as an integrated pharmaceutical company with a global footprint, operating in the domains of Animal Health (API and formulation) and Human health (API). Company have branded Animal Health business as Alivira Animal Health with a singular focus to create value in the global animal health space and cater to unaddressed global market requirements and focus on products for livestock, poultry and companion animals. Risks & Concerns Pharmaceutical companies face the regulatory risk of approving each of its products and manufacturing facilities by the respective regulating body of the country in which it plans to sell its drug. Also regulatory risks emanating from quality issues could also have a significant impact on the earnings visibility of pharma companies. Due to low costs, qualified staff and extensive production and research units India is becoming more and more of a major pharmaceutical location. More companies from the developed economies are setting base in the country. Also companies from Asia are continuously seeking to tap the global markets. All these factors lead to stiff competition in the pharma industry. Any disruption in provision of an un-interrupted supply of Codeine by the Government could impact company's financials. Delay in commencement of new tablet manufacturing facility along expected timelines and within the estimated costs, and stabilization of the facility in line with current plans if doesn t happen properly could result in cost overruns and impact the financials of the company. Any adverse changes in Patent product pricing, Pharma Marketing Policy, Patent Act or significant shift in government view on Product Patents could affect Astrazeneca. Also any adverse changes in Government policies on import of medicines in bulk or tablet form and those on clinical trials or associated compensation rules could hurt its sales and revenues. Page 3

4 Valuation Conclusion Demerger of the Human API Business into Solara Active Pharma Sciences Limited which will also house the Commodity API Business of Strides Shasun Limited, will help achieve critical scale & size and emerge as one of the largest API companies from India. This combination will catapult SAPS to be one of the largest standalone API companies in the country supplying commodity and niche APIs globally. The business will create value for its stakeholders with its differentiated strategy and highly compliant manufacturing facilities. Company has clocked robust revenue and record growth in profitability during Q2 FY 18, demonstrates the successful outcome of strategies that company embarked upon few years back. On business front, Alivira now contributes to over 65% of the consolidated revenues. Geographically, Europe has contributed to more than 50% of the Alivira business and with the recent US FDA approval for Vizag facility, company expect the US business to ramp up exponentially & also gaining sustainable traction in our Brazilian and Turkish business. So, taking these into consideration, Low debt equity ratio and 57 % promoter stake, the share can move to a level of about ` 130 in next one year. Therefore, we recommend to BUY. Page 4

5 Disclosures & Disclaimers Disclosures : 1) Business Activity : Rudra Shares & Stock Brokers Limited is engaged in the business of providing broking services & distribution of various financial products. RUDRA is also registered as a Research Analyst under SEBI(Research Analyst) Regulations, SEBI Reg. No. INH ) Disciplinary History : There has been no instance of any Disciplinary action, penalty etc. levied/passed by any regulation/administrative agencies against RUDRA and its Directors. Pursuant to SEBI inspection of books and records of Rudra, as a Stock Broker, SEBI has not issued any Administrative warning to Rudra. 3) Terms & Conditions of issuance of Research Report: The Research report is issued to the registered clients. The Research Report is based on the facts, figures and information that are considered true, correct and reliable. The information is obtained from publicly available media or other sources believed to be reliable. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation to buy or sell or subscribe for securities or other financial instruments for clients. 4) Disclosures with regard to ownership and material conflicts of interest : Sr. No. Disclosures Yes/No a) Rudra or its research analysts, or his/her relative or associate has any direct or indirect No financial interest in the subject company. b) Rudra or its research analysts, or his/her relative or associate has any other material No conflict of interest at time of publication of the research report. c) Rudra or its research analysts, or his/her relative or associates have actual/beneficial No ownership of one per cent or more securities of the subject company. 5) Disclosures with regard to receipt of compensation : Sr. No. Disclosures Yes/No a) Rudra or its associates have received any compensation from the subject company in the No past twelve months. b) Rudra or its associates have managed or co-managed public offering of securities for the No subject in the past twelve months. c) Rudra or its associates have received any compensation or other benefits from the subject No company or third party in connection with the research report. 6) Other Disclosures: Sr. No. Disclosures Yes/No a) The research analyst has served as an officer,director,employee of the subject company. No b) Rudra or its research analyst has been engaged in market making activity for the subject No company. c) Rudra or its or associates have received any compensation from the subject company in the No past twelve months. Page 5

6 Disclaimers: This Research Report (hereinafter called report) has been prepared and presented by RUDRA SHARES & STOCK BROKERS LIMITED, which does not constitute any offer or advice to sell or does solicitation to buy any securities. The information presented in this report, are for the intended recipients only. Further, the intended recipients are advised to exercise restraint in placing any dependence on this report, as the sender, Rudra Shares & Stock Brokers Limited, neither guarantees the accuracy of any information contained herein nor assumes any responsibility in relation to losses arising from the errors of fact, opinion or the dependence placed on the same. Despite the information in this document has been previewed on the basis of publicly available information, internal data, personal views of the research analyst(s)and other reliable sources, believed to be true, we do not represent it as accurate, complete or exhaustive. It should not be relied on as such, as this document is for general guidance only. Besides this, the research analyst(s) are bound by stringent internal regulations and legal and statutory requirements of the Securities and Exchange Board of India( SEBI) and the analysts' compensation was, is, or will be not directly or indirectly related with the other companies and/or entities of Rudra Shares & Stock Brokers Ltd and have no bearing whatsoever on any recommendation, that they have given in the research report. Rudra Shares & Stock Brokers Ltd or any of its affiliates/group companies shall not be in any way responsible for any such loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Rudra Shares & Stock Brokers Ltd has not independently verified all the information, which has been obtained by the company for analysis purpose, from publicly available media or other sources believed to be reliable. Accordingly, we neither testify nor make any representation or warranty, express or implied, of the accuracy, contents or data contained within this document. Rudra Share & Stock Brokers Ltd and its affiliates are engaged in investment advisory, stock broking, retail & HNI and other financial services. Details of affiliates are available on our website i.e.. We hereby declare, that the information herein may change any time due to the volatile market conditions, therefore, it is advised to use own discretion and judgment while entering into any transactions, whatsoever. Individuals employed as research analyst by Rudra Shares & Stock Brokers Ltd or their associates are not allowed to deal or trade in securities, within thirty days before and five days after the publication of a research report as prescribed under SEBI Research Analyst Regulations. Subject to the restrictions mentioned in above paragraph, we and our affiliates, officers, directors, employees and their relative may: (a) from time to time, have long or short positions acting as a principal in, and buy or sell the securities or derivatives thereof, of Company mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or profits. RUDRA SHARES & Phone: Page 6