Limited near term gains for Syngene International stock in pharma space

Sharp re-rating has turned the stock into the most expensive in the pharma space

The Syngene International stock has been among the bigger outperformers in the pharma space, doubling in value over the past year. The gains came on the back of expectations that a rise in research and development programmes of innovators and the expansion of its contract manufacturing business will boost its medium-term prospects. Development of an antibody test kit for Covid-19 and tie-up for broad-spectrum antiviral Covid-19 medication Remdesvir added to the gains.

Higher valuation multiple for companies in the contract research and manufacturing services space led to a sharp price-to-earnings (P/E) ratio rerating and turned the Syngene stock into the most expensive within the pharma space. The stock, which was trading at 32x its one-year forward P/E estimate a year ago, is now trading at 53x on that parameter. The BSE Healthcare index in comparison trades at half that number and its rerating has been modest.

The key medium-term trigger is the ongoing expansion and revenue accretion from the same later this year. An analyst at a domestic brokerage believes that the $100-million facility being built at Mangaluru will be a forward integration from molecules to manufacturing. Contract manufacturing revenues, according to him, is stickier than contract research and will help it scale up its revenues.

The company has spent Rs 1,275 crore over the past five years and is expected to spend another Rs 2,100 crore over FY21-23. Analysts at ICICI Securities believe aggressive capex is on the back of order book visibility.

Analysts expect the company to repeat the 16 per cent growth trajectory achieved over FY16-20 in the next three years, while margins can trend up on better pricing and operating leverage. Earnings growth, therefore, is expected to be in the 17-20 per cent range on an annual basis over FY20-23.

While its capex programmes will yield results, the plan for vaccination and better Covid-19 antiviral alternatives may impact revenues for Covid-related products. Current valuations factor in the near-term gains and the stock trades at a premium to the consensus target price.