Syncom Healthcare IPO Review

Syncom Healthcare (SHL) is an Indore based pharmaceutical company promoted by Ajay Bankda and his family. The company manufactures and markets pharmaceutical formulations under its own brands in ethical, OTC, generic and herbal segments. It company established its first manufacturing facility at Selaqui, Dehradun, in Uttarakhand, for manufacturing all types of formulations in November 2006.

SHL came into existence on July 29, 2002 during family partition to carry the domestic formulation business of Syncom Formulation (SFL). Subsequently, SHL and SFL entered into an agreement on use of certain trademarks/copyrights/brands in the domestic and export markets. Under the agreement, SHL cannot sell its products in export markets under the ‘Syncom' brand for the products covered in the agreement, whereas SFL cannot sell these products in domestic market.

SHL started by marketing pharmaceutical products manufactured by others under its own brand. After commencing its own manufacturing facility, it also started contract manufacturing. The company produces more than130 products in the generic segment, 40 products in the OTC segment, 20 products in the ethical segment and 25 products in the herbal segment.

As a growth strategy, SHL is planning to enter overseas market. For this purpose, it proposes to set up a UK MHRA, US FDA and WHO-cGMP compliant formulation manufacturing facility at Indore SEZ. To boost revenue from contract manufacturing, the company is upgrading existing plant and planning to get WHO approval.

The object of the issue is to raise funds to finance its future plans (1) to set up new manufacturing unit at Indore SEZ for manufacturing various pharmaceutical formulations: Rs 20.48 crore; (ii) to undertake the upgradation/ modernization of manufacturing facilities at the Dehradun plant: Rs 6.62 crore; (iii) to meet working capital requirements: Rs 15 crore; (iv) to set up an export office at Mumbai: Rs 4.00 crore; and (v) to undertake brand & product registration and approval: Rs 3.00 crore. The balance is for general corporate purposes as well as public issue expenses.

Strengths

* The manufacturing facility at Dehradun was set up in a tax-free and duty-free zone. The company enjoys 100% excise duty exemption for 10 year from the year of commencement of production (2006), 100% income tax exemption for first 5 years from assessment year, and 30% exemption for subsequent 5 years.
* Currently, the company is undertaking contract manufacturing (a healthy margin business) for domestic and international companies. Top clients are Lupin, Piramal Healthcare and Galpha Labs.
* The promoter has experience of over 26 year in the pharma sector.

Weaknesses

* The trade agreements between SHL and SFL limit exports of many existing branded products of the company. However, the company can sell these products in export market with different brand names.
* The company has not entered into any agreement for acquiring land for the new manufacturing facility. It expects to acquire land by March 2010 and commence commercial production by December 2010. The process will be affected if there is any delay in project execution / regulatory approvals.
* There is considerable delay in getting approvals from US FDA / UK MHRA of late. By thumb rule, it takes at least two years for getting approval from UK MHRA and US FDA for manufacturing facility. So, for significant revenue from advanced markets from the Indore facility, the company / investors may have to wait for even up to three years from now.
* The company's cash flows from operations were negative in four out of the last five years. Even for the four months of the current fiscal, they are negative.
* The revenue contribution from Top 10 clients increased from 40.25% in 2005 to 68.95% in 2009. There is high concentration of revenue from top 10 clients. Loss of any one or more of these clients could adversely affect the company's performance. In the same way, the top 5 suppliers constitute more than 50% of purchases. If any these suppliers fail to provide raw materials of specified quality and quantity at proper time, it will also impact the company's performance.
* The company gets a sizeable portion of its revenue from domestic generic market. To push through its products in this competitive market, it appears to have given huge credit, with 47-52% of the revenue remaining as sundry debtors in the last few years. This not only locks the company's funds, but also exposes it to high credit risk.
* The company's margins have been steadily eroding from 17.6% in FY 2007 to 15.8% in the four months ended July 2009.

Valuation

Sales of SHL increased by 17% to Rs 60.56 crore for the year ended March 2009. But its net profit rose mere 3% to Rs 3.81 crore, on fall in margins. The company recorded sales of Rs 20.99 crore (i.e. 35% total sales of FY 2009) and profit of Rs 1.79 (i.e., 47% of profit in FY 2009) for the four months ended July 2009. At the offer price band of Rs 65-Rs 75, the EPS of Rs 2.2 for FY 2009 is discounted by 29.5 to 34.1 times. However, at annualized EPS of 3.1 for the four months ended July 2009, the P/E stands at 21 to 24.2 times at the lower and upper band respectively. But the TTM P/E of the Pharma – Formulation sector is just 8.8.