Rating Rationale
July 19, 2019 | Mumbai
Syngene International Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore
Long Term Rating CRISIL AA/Positive (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Positive/CRISIL A1+' ratings on the bank facilities of Syngene International Limited (Syngene). 

Revenue grew 28% in fiscal 2019, driven by the discovery services segment and aided by the development and dedicated services segments.  Operating margin, though lower, was still healthy at 29.3% in fiscal 2019 (33.3% in fiscal 2018).  The ratings reflect expectations of sustained improvement in Syngene's credit risk profile, driven by healthy revenue growth and operating profitability.

Addition of new clients and increasing scope of existing contracts by established clientele clients will ensure steady revenue growth momentum over the medium term. 

Planned capital expenditure (capex) of Rs 650-700 crore annually over fiscals 2020 and 2021, includes capacity expansion, completion of the active pharmaceutical ingredients (API) facility and research and development centres. Completion of the ongoing capex, without any material time or cost overruns, and its monetisation will be the key monitorables. The financial risk profile is expected to remain strong, marked by a healthy networth, prudent capital structure and healthy debt protection metrics.

The rating continue to reflect Syngene's established market position in contract research, backed by strong clientele, and healthy financial risk profile. The ratings also factor the benefits that the company derives from being a subsidiary of Biocon Ltd (rated 'CRISIL AA+/Stable/CRISIL A1+'), India's leading bio-pharmaceutical company. These strengths are partially offset by exposure to risk of time and cost overrun in the ongoing capex, and exposure to intense competition and regulatory risks.

Analytical Approach

For arriving at the ratings, CRISIL has factored in strong operational, financial, and managerial support from Biocon. CRISIL has consolidated business and financial risk profiles of Syngene and its subsidiary, Syngene USA Inc, to arrive at the ratings.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in contract research
Syngene is one of India's leading contract research organisation (CRO). It offers integrated services across the drug discovery and development value chain, and provides research services in medicinal chemistry and biology to innovator pharmaceutical companies. The established market position is reflected in the large client base of 331 companies, including eight of the top 10 global pharmaceutical majors such as Bristol-Myers Squibb Co (BMS; rated 'A+/Watch Negative/A-1+' by S&P Global Ratings), Baxter International Inc (Baxter; 'A-/Stable/A-2' by S&P Global Ratings) and Amgen Inc (Amgen; rated A/Stable/A-1 by S&P Global Ratings). Syngene has dedicated R&D centres for BMS, Amgen, Baxter and Herbal life. Revenue has recorded a compound annual growth rate of 18% over the three fiscals ended March 31, 2019, to reach Rs 1,826 crore.
 
* Strong parentage
Syngene is a 70.24% subsidiary of Biocon, and hence, likely to receive need-based financial support from the parent. While business operations of both companies are different - Biocon manufactures and markets biopharmaceutical formulations, and Syngene undertakes contract research for pharmaceutical, biotechnology, nutrition, agrochemical, animal health and consumer goods companies. Syngene will continue to contribute one-third of consolidated revenue and profit of Biocon, backed by healthy growth in revenue and higher operating profitability.  The contribution to operating profit was higher in fiscal 2018, due to subdued performance of Biocon's other segments. However, in fiscal 2019 Biocon's biopharmaceutical sales and profitability improved and Syngene accounted for 31% of revenue and 38% of operating profits of consolidated Biocon.
 
* Healthy financial risk profile
Adjusted gearing was 0.42 time as on March 31, 2019, and may remain stable in the medium term. For fiscal 2019, debt protection metrics were strong, with interest coverage ratio of 19 times. Financial risk profile will be supported by healthy internal accrual and liquidity. The ongoing capex is being prudently funded with internal accruals and healthy liquid surpluses.  
 
Weaknesses
* Exposure to risks related to large capex
Syngene incurred a capex of over Rs 1,500 crore between fiscal 2016 and 2019, which is partly commercialised. This was incurred towards its research centre and phase 1 of its biologics manufacturing facility in Bangalore and partly towards API manufacturing facility in Mangalore. Further, the company has announced an additional capex of Rs 1,400 crore (USD 200 million) which spans over two years, beginning fiscal 2020. This will be incurred towards its API manufacturing facility in Mangalore, increasing capacity for biologics manufacturing and new research centres at Bangalore. The capex is being funded through internal accrual and liquid surplus. APIs will be sold to innovators to meet their commercial requirements for launching new chemical entities. Syngene will remain exposed to risks related to implementation of the capex, and demand risk for the API project.
 
* Susceptibility to regulatory changes and increasing competition
The contract research industry is highly fragmented, owing to low entry barriers. Several large pharmaceutical players globally are outsourcing contract research activities to India and China. Hence, more CROs may enter the industry, thereby increasing competition, and constraining pricing flexibility of established players like Syngene. Additionally, the competition is intense from CROs based in China, Eastern Europe and others which may have broader portfolio of services.
Liquidity

Syngene has ample liquidity, driven by expected cash accrual of Rs530 - 660 crore per annum in fiscals 2020 and 2021, and healthy cash and cash equivalents of Rs 1,100 crore as on March 31, 2019, sufficient to cover the maturing debt of around Rs 261 crore and Rs 347 crore in fiscals 2020 and 2021, respectively, and annual capex of Rs 650-700 crore. With a gearing of 0.42 times as on March 31, 2019, Syngene has sufficient headroom to raise additional debt for its capex if needed. The unutilised bank limit is also adequate to meet the incremental working capital needs over the next one year.

Outlook: Positive
CRISIL believes Syngene's business risk profile is likely to benefit from expansion of the client base and increase in time and scope of existing contracts. The rating will be upgraded if the company reports substantial and sustained growth in revenue and cash accrual, supported by successful monetisation of the ongoing capex, while the financial risk profile remains healthy. The outlook may be revised to 'Stable' if there is a material time or cost overrun in capex, or weakening of profitability adversely affects the financial risk profile. The ratings will remain sensitive to any movement in CRISIL's ratings on the bank facilities of Biocon.
About the Company

Syngene is one of India's leading CROs. The company offers research services in medicinal chemistry and biology in early stages of drug discovery, through process development and custom manufacturing of biotherapeutics for human trials. It offers integrated discovery and development services across multiple technology platforms, including small molecules, large molecules, antibody-drug conjugates and oligonucleotides. It has 331 clients in the pharmaceutical, biotechnology, nutrition, animal health, consumer goods and specialty chemicals industries, including eight of the top ten global pharma companies. It has a team of over 4,000 scientists.

As of March 2019, Biocon held 70.24% of the shareholding of Syngene. It is listed on the National Stock Exchange of India Ltd and Bombay Stock Exchange Ltd.

Key Financial Indicators
As on/For the period ended March 31 2019 2018
Revenue* Rs crore 1826 1423
Profit After Tax (PAT) Rs crore 331 305
PAT Margin % 18.1 21.4
Adjusted debt/adjusted networth Times 0.42 0.47
Adjusted Interest coverage Times 18.87 22.94
*Revenues from operation

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Cr)
Rating Assigned
with Outlook
NA Buyer's Credit NA NA NA 35.0 CRISIL AA/Positive
NA Letter of Credit & Bank Guarantee NA NA NA 18.5 CRISIL A1+
NA Overdraft NA NA NA 5.0 CRISIL A1+
NA Packing Credit in Foreign Currency NA NA NA 181.5 CRISIL A1+
NA Packing Credit in Foreign Currency* NA NA NA 60.0 CRISIL AA/Positive
*Fully interchangeable with cash credit
 
Annexure - List of Entities Consolidated
Type of consolidation Companies
Fully consolidated Syngene USA Inc.
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  281.50  CRISIL AA/Positive/ CRISIL A1+      31-05-18  CRISIL AA/Positive/ CRISIL A1+  14-02-17  CRISIL AA/Stable/ CRISIL A1+      CRISIL AA/Stable/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST  18.50  CRISIL A1+      31-05-18  CRISIL A1+  14-02-17  CRISIL A1+      CRISIL A1+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Buyer`s Credit 35 CRISIL AA/Positive Buyer`s Credit 35 CRISIL AA/Positive
Letter of credit & Bank Guarantee 18.5 CRISIL A1+ Letter of credit & Bank Guarantee 18.5 CRISIL A1+
Overdraft 5 CRISIL A1+ Overdraft 5 CRISIL A1+
Packing Credit in Foreign Currency 181.5 CRISIL A1+ Packing Credit in Foreign Currency 181.5 CRISIL A1+
Packing Credit in Foreign Currency* 60 CRISIL AA/Positive Packing Credit in Foreign Currency* 60 CRISIL AA/Positive
Total 300 -- Total 300 --
*Fully interchangeable with cash credit.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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