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Suven Lifesciences: In consolidation phase - Views on News from Equitymaster
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Suven Lifesciences: In consolidation phase
Aug 20, 2015

Suven Lifesciences has announced its 1QFY16 results. The company reported a decline of 28.7% YoY and 41.6% YoY in net sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales declined by 28.7% YoY during the quarter. This was largely due to absence of pre-launch supply (which was made in 1QFY15) in its CRAMS segment.
  • These supply contracts being high margin, the absence of these revenues also impacted the overall operating margins. Consequently, the operating margins fell sharply by 13.6%.
  • Consequently, the bottomline fell sharply by 41.6% YoY.

Financial performance Standalone: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 1,415 1,010 -28.7%
Expenditure 871 759 -12.9%
Operating profit (EBDITA) 544 251 -53.9%
EBDITA margin (%) 38.5% 24.9%  
Other income  11 51 369.9%
Interest (net)  12  9 -20.5%
Depreciation  30 29 -2.7%
Profit before tax 514 263 -48.7%
Tax 166 61 -63.6%
Exceptional gain/(loss)   -    
Profit after tax/(loss) 348 203 -41.6%
Net profit margin (%) 24.6% 20.1%  
No. of shares (m)   127.3  
Diluted earnings per share (Rs)    7.7  
Price to earnings ratio (x)*   32.6  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • The CRAMS (Contract Research and Manufacturing Services) business declined by 31.1% YoY. Absence of some lucrative contracts impacted the company's business. These contracts were there in 1QFY15. However, the service segment, which contributes around 5% to total sales, witnessed robust growth of 104% YoY. The management expects flattish growth for the current fiscal and expects the current fiscal to be a consolidation year for the company.

  • Suven's operating margins fell sharply due to absence of repeat orders. The company expects the margins for FY16, to remain subdued due to lack of visibility on lucrative orders.

  • Owing to the poor operational performance, the bottomline declined by 41.6% YoY for the quarter. The current fiscal is expected to remain under pressure.
What to expect?

Based on recent developments, we have also revised our estimates. At the current price of Rs 250, the stock is trading at a price to earnings multiple of 15.3 times our estimated FY18 earnings. Given that Suven's business model is largely dependent on client orders, there is high probability that the contracts could get delayed beyond the stated time lines. Hence, the performance could remain depressed in such quarters. While the last two quarters have seen weak growth, the company witnessed stupendous performance in the prior quarters.

Going forward, the volatility is expected to come down as the company focuses on building a bigger client base. It has also been accumulating more and more orders which will help in diversifying risks.

Suven currently has 111 projects in various phases, one of which 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 quite a lot on its R&D programs. Thus, any positive trigger will be a bonus, as we have not factored in any upside from such programs, though we are expensing out the costs.

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.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single small cap stock comprises more than 2-3% of your portfolio.

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