Syngene: Investors with long term view should look at the stock on dips

While Covid-19 could is a near term opportunity, contract manufacturing is the key medium-term trigger

Syngene International, which has gained 20 per cent over the past two weeks, hit its all-time high of Rs 596.85 a share on Thursday. 

Approval by the Indian Council of Medical Research for its anti-body testing kit was the key trigger. The company has tied up with biosciences company HiMedia Laboratories for manufacture of the test kit. 

Syngene’s voluntary licensing agreement with Gilead to manufacture and supply the broad spectrum anti-viral remdesivir spells another opportunity.

Shrikant Akolkar of Ashika Institutional Research says that given rising infections and the absence of a vaccine, remdesivir could gain major market share. Further, given Gilead’s forecast of 2 million treatment courses by December and shortage of the same, any concrete outcome of the ongoing due diligence could lead to an earnings upgrade.

With global pharma majors facing higher costs and intense competition, the trend of outsourcing is expected to pick up pace. This will, in turn, benefit contract research firms like Syngene. Analysts expect the share of outsourcing to increase to 40 per cent by 2022, from 27 per cent in 2017.

Even as the global contract research organisation (CRO) and manufacturing services market is expected to grow 7-8 per cent annually, Syngene is expected to grow at 3x the rate given its relationships, expanding client base, and capabilities.

The major factor, however, is the completion of its Mangaluru facility by the end of FY21. The facility will help the firm become vertically integrated and tap the growing market for contract manufacturing services.

The plant, built at an estimated cost of $100 million (Rs 740 crore), could generate sales of Rs 900 crore, say analysts. Gains, both from this plant and other services, could increase depending on better pricing and rupee depreciation.

Further, the end of the ongoing capital expenditure cycle will help improve operating leverage and asset turnover.

The stock, trading at 44x its FY22 earnings, has factored in some of the gains. Investors with a long-term view can look at the stock on dips.