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Suven Lifesciences: Poor quarter - Views on News from Equitymaster

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Suven Lifesciences: Poor quarter
May 29, 2015

Suven Lifesciences has announced its 4QFY15 results. The company has reported a decline of 15.4 YoY in net sales. The company's bottomline too declined and was down by 47.9% YoY. Here is our analysis of the results.

Performance summary
  • Net sales declined by 15.4% YoY during the quarter. This was largely due to absence of pre-launch supply made in 4QFY14 in its CRAMS segment. The growth in specialty was healthy.
  • Consequently, the operating margins fell sharply by 14.1%. The operating margins for the quarter stood at 22.2% vs 36.3% YoY in 4QFY14.
  • Bottomline plummeted sharply by 47.9% YoY due to poor performance at the operating level and onetime expenses.

Financial performance Standalone: A snapshot
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 1,308 1,107 -15.4% 5,103 5,209 2.1%
Expenditure 833 861 3.4% 2,913 3,518 20.8%
Operating profit (EBDITA) 475 245 -48.3% 2,190 1,691 -22.8%
EBDITA margin (%) 36.3% 22.2%   42.9% 32.5%  
Other income 12 38 216.7% 30 86 184.1%
Interest (net) 17 13 -25.4% 105 47 -55.3%
Depreciation 23 24 7.3% 88 98 10.5%
Profit before tax 447 246 -44.9% 2,027 1,632 -19.5%
Tax 123 57 -53.6% 586 428 -26.9%
Exceptional gain/(loss)   (20)   - (117)  
Profit after tax/(loss) 324 169 -47.9% 1,441 1,088 -24.5%
Net profit margin (%) 24.8% 15.3%   28.2% 20.9%  
No. of shares (m)         127.3  
Diluted earnings per share (Rs)         8.5  
Price to earnings ratio (x)*         32.3  
*based on trailing 12 months earnings

What has driven performance in 4QFY15?
  • The CRAMS (Contract research and manufacturing services) business, which contributes approximately 68% to total sales, is an important growth driver for the company. FY14 was robust for the company since it had received high margin orders. But since there were not many such orders in FY15, the growth was subdued. The specialty segment witnessed healthy growth at 34% YoY for the quarter.

  • Suven's operating margins dipped sharply due to absence of repeat orders. It is pertinent to note, while the company was expecting some orders for 4QFY15, these orders have been postponed.

  • Higher base effect in 4QFY14 coupled with poor performance at the operating level impacted the bottom line. Further, there is one off related to higher depreciation charged against some assets this is non recurring in nature. Excluding this exceptional expenses, the profits are down by 41.6% YoY.
What to expect?
At the current price of Rs 276, the stock is trading at a price to earnings multiple of 13.3 times our estimated FY18 earnings. It is imperative to note, that Suven' business model is largely dependent on the client orders. Hence there is high probability that the contracts could get postponed or delayed. We have already seen this happening in the current quarter. The company was expecting quite a lucrative contract from its client which has been delayed. The management has not mentioned any particular timeline to this. Such instances pose biggest threats for the company.

Having said that, Suven has been accumulating more and more orders which help in diversifying this risk. Suven has currently 108 projects in various phases, one of these project is in Ph III. This means any positive trigger in this project will be positive for the company too. Over and above, the company is spending crores of rupees for its R&D programs; any positive trigger will be a bonus, since we have not factored in any upside from such programs.

We recommend investors who have the stock in their portfolio to not Buy more and Hold on to the same. Those who want to invest yet in Suven, can put 25% of the money they intend to put into the stock at current levels.

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