Sygene IPO: Subscribe with a 18 months time horizon

COMPANY

The Bangalore based firm, incorporated in the year 1993, now became one of the well known and leading CRO (Contract research organization) in India. They are a subsidiary of Biocon Limited (“Biocon”), a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. The company offers service in discovery and development of small molecules, large molecules, antibody-drug conjugates (“ADC”) and oligonucleotides. The company offers a suite of integrated, end-to-end discovery and development services for novel molecular entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies.

Source: Company                                                                     

As of March 31, 2015, their tangible fixed assets (gross block) were Rs 9,311 million. Their laboratory and manufacturing facilities are spread over more than 900,000 sq. ft. and located in Bengaluru, India. As of May 31, 2015, the firm had 2,122 scientists, including 258 Ph.Ds. and 1,665 scientists with a Master’s degree.

During fiscal 2015, the firm has serviced 221 clients, ranging from multinational corporations to start-ups, including eight of the top 10 global pharmaceutical companies by sales for 2014. Syngene also have longstanding, extensive relationships with multinational clients such as BMS, Baxter, and Merck & Co.

INDUSTRY

Frost & Sullivan estimates that global R&D expenditure for the pharmaceutical industry in 2014 was approximately US$139 billion, of which US$105 billion could have potentially been outsourced.  Outsourcing penetration for the CRO market for development services as of 2014 was estimated to be 27.3% of the potential outsourcing market for development services, but poised to grow to 38.7% in 2019, reflecting a CAGR of 12.5%. 

• The global CRO market for discovery services was estimated to be US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5% (2014-2018). 
• The global CRO market for development services was estimated to be US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014–2018) of 11.6.

FINANCIAL PERFORMANCE

Historical Performance of Syngene

For the fiscal year ended March 31, 2015, the firm generated total revenue of Rs 8,716 million, restated profit of Rs 1,750 million and EBITDA of Rs 2,928 million. For the fiscal year ended March 31, 2014, we generated total revenue of Rs 7,077 million, restated profit of Rs 1,348 million and EBITDA of Rs 2,226 million. For the three fiscal years ended March 31, 2015, their total revenue, restated profit and EBITDA grew at a CAGR of 27.7%, 35.1% and 28.3%, respectively.

VALUATION

The price band is between Rs 240 to Rs 250. The valuations are slightly expensive. The company is available at a P/E of 27.4x to 28.6x based on the EPS for FY15 i.e. Rs 8.80. The valuations are justified by the strong growth prospects of the company. Hence, we suggest SUBSCRIBE with a time horizon of atleast 18 months.

Buy Kitex Garments for a target of Rs 1500 for a period of 9 months

Kitex Garments, a part of the Anna – Kitex group of companies with easy access to sea and airports. The company was established in 1992 and today it has become to be one of the largest exporters of infants garments in India. Not only that, Kitex has also become world’s 3^rd largest manufacturer of infant wear. The company has a strong international presence especially in US and Europe.

Source: Company                                                                                                                 

The company’s product line includes body suits, sleepwear, rompers, burps, bibs, training pants. The company is also one of the largest employer in the private sector employing over 7000 people. The current manufacturing facility produces 250,000 units of garments per day.

India has a share of 25 per cent in the global spinning capacity. India produces 20 per cent of global cotton supply both for domestic use and for export. The country ranks No.2 in global textile and apparel exports with nine per cent growth since 1995. About 27 per cent of the foreign exchange earnings are on account of export of textiles and clothing alone. Indian textile and apparel exports to the US rose nearly 6.5 per cent. As per the DGCSI – India statistics the garments segment witnessed a growth of 16% during Apri-December (FY15) as against the same period in (FY14). The overall textile and garment exports, is expected to reach $41 billion in 2014-15, compared with $39.3 billion in the previous year. Children’s wear market in which infant wear is a segment, is one of the most profitable segments in the global apparel industry and is estimated to hit a value of 173.6 billion dollars by 2017. In developed economies, although birth rates are generally in a downtrend, parents are spending more on their children, offering a wealth of opportunities for babies’ and children’s products. The industry also has great potential in the BRIC countries, given the sheer size of the population of babies and children and the burgeoning middle class. At this point, Europe and the U.S are the major consumers of the global children wear market.

The company has posted extra-ordinary superb returns in the past fiscal. In the FY15, the PAT margin has increased by more than 600 bps to reach 19% margin. The revenue has increased by more than Rs 700 cr to touch revenue of Rs 5,247 cr in FY15. From Rs 1,109 cr, the operating profit increased at an extra ordinary pace to touch Rs 1,841 cr. The company has delivered great returns to the shareholder by posting an increasing trend in the ROE’s. The company has posted an ROE of 27%, 39%, 45% for FY13, FY14, FY15 respectively.

The company has good prospects in the future as the global economy is expected to improve. The developed economies are stable and as the financial stability improves, the consumers will spend for their infants well care. The company also has plans to start operations in US to establish a strong market. In future, the firm also plans to start manufacturing under their own brand name. The stock may look expensive but one should consider buying the stock on dips. We suggest a buy with a target price of Rs 1500 in the next nine months.

Source: Bloomberg                                                                                                     Kitex vs NIFTY

Research on DCB Bank: Buy with a target of Rs 170

DCB Bank is one of the new emerging banks of India. The bank has been in existence since 1930’s and is the only co-operative bank to get converted into private bank in 1995. There are about 154 branches in 94 locations, 328 ATM’s across the nation. The bank has strong presence in Gujarat, Maharashtra, Telengana and in the current fiscal year, the bank will expand to Chhattisgarh, Madhya Pradesh, Odisha, Punjab & Rajasthan.

The bank has various financial products in the following areas:  Micro SME, SME, Retail Mortgages, Commercial Vehicle, Gold Loans, mid-Corporate and Agri / Inclusive Banking. Mortgages contribute about 45% of the loan portfolio of the bank followed by corporate banking 23%, SME/MSME 13%. The bank has a CASA of 23.40% and CRAR of 14.95% under BASEL III. The bank is focusing on the retail segment for building deposits. The bank has also increased its fee income by cross selling insurance, mutual funds, and trade and cash management. The promoter’s hold 16.33% stake, and there is an increase in the FII and DII holdings indicating strong growth prospects of the bank.

Although the stock market sentiment has improved, the economic conditions continued to be difficult. The banking industry continues to be under pressure due to rising NPAs and restructured loans. The MSME / SME sector plays a very important role in the growth of the Indian economy. It is estimated that MSME / SME contribute 17% to GDP and employs over 70 mn people in about 30 mn units. According to IBEF, total Indian banking sector assets reached US$ 1.8 trillion in FY14 from US$ 1.3 trillion in FY10, with 70 per cent of it being accounted by the public sector. Total lending and deposits increased at a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent, respectively, during FY07-14 and are further poised for growth, backed by demand for housing and personal finance. In the past fiscal year, private sector have outperformed the state and government run banks.

The bank has grown by 61% (y-o-y) for the quarter ending March’15 in terms of net profit. This growth is largely due to the growth in assets that led to immense increase in net interest income of the bank. The operating cost to operating income ratio has come down significantly for the past four years i.e. from 74.45% in FY12 to 58.83% in FY15. The Net NPA is almost stable for the past four quarters at 1%. The net profit margin for the bank is around 28% for the FY15 which is the highest in the banking industry.

The bank is currently trading at Rs 147 with a P/E of 21.7x (industry P/E 21.5x). The bank’s ROE has been growing at a robust 31% CAGR over the past three years. The credit policy of the bank is well maintained to restrict the NPA to 1% whereas the industry average NPA is 2.5%. Considering the bank’s expansion plans and increasing asset in the balance sheet, we recommend a BUY with a target price of Rs 170.

DCB Bank vs Bank Nifty                                              Source: Google finance