Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank loan facilities of Syngene International Ltd (Syngene).

 

The ratings continue to reflect the established market position of Syngene in contract research, diverse clientele, and healthy financial risk profile. The ratings also factor in benefits derived from being a subsidiary of Biocon Ltd (Biocon; ‘CRISIL AA+/Stable/CRISIL A1+’), the leading biopharmaceutical company of India.

 

The ratings also consider the continued healthy operating performance of Syngene, as reflected by strong revenue growth and operating profitability. The revenues witnessed an on-year growth of 9% in fiscal 2024 to Rs. 3,489 crore while the operating profitability margin remained strong at 29.1% during the fiscal. During the first six months of fiscal 2025, the company registered revenue of Rs 1,681 crore indicating on-year degrowth by 2% due to slower growth in the research business and deferral of CDMO project milestones to latter half of the year. That said, revenue growth in H2 of fiscal 2025 is expected to pick up through growth in revenues across all the business segments. Crisil Ratings expects mid to high single digit revenue growth in fiscal 2025 and remain at low to mid double digits growth in the medium term with improvement in the demand scenario as the company witnesses increased enquiries from its customers with green shoots in the macro-economic conditions.

 

The business risk profile of the company remains supported by the long-term contracts with Bristol-Myers Squibb Co (BMS; rated ‘A/Stable/A1’ by S&P), Baxter International Inc (Baxter; rated ‘BBB/Negative/A2’ by S&P Global Ratings [S&P]) and Amgen Inc (Amgen rated ‘BBB+/Negative/A2’ by S&P) for its research business and a 10-year contract with Zoetis Inc for drug substance manufacturing, which keeps the revenue profile steady in dedicated center segment. The operating margin moderated to 24.6% in the first six months of fiscal 2025 as compared to 29.1% in previous corresponding period due to lower operating leverage and slower growth in research business. However, this is expected to improve to 27-29% for the full year as the research business is expected to pick up momentum amid better operating leverage.

 

Financial risk profile continues to be strong, marked by steady accretion to reserve and low debt levels. Gearing is estimated to remain low amid debt repayment and healthy networth. With healthy profitability, prudent working capital management and internally funded organic capex, debt protection metrics will be strong, with gearing expected at less than 0.2 time and interest coverage more than 20 times going forward.

 

These strengths are partially offset by the risk related to regulatory changes and competition, ability to timely scale-up the operations and exposure to intense competition and regulatory risks.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in strong operational, financial, and managerial support from Biocon, and has combined the business and financial risk profiles of Syngene and its subsidiaries.

 

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, diverse clientele, and strong operating capabilities: Syngene is a leading contract research and manufacturing services (CRAMS) organisation in India. The company began operations with the research vertical and slowly emerged to the development business, with a revenue mix of nearly 60% from the discovery and dedicated center business and remaining from the development business in fiscal 2024. It offers integrated services across drug discovery and development value chain and provides research services in medicinal chemistry and biology to innovator pharmaceutical companies. The established market position of the company is reflected in its large clientele of over 400 companies, including 13 of the top 15 global pharmaceutical majors. Syngene has dedicated research and development (R&D) centres for BMS, Amgen and Baxter. Syngene has demonstrated continued focus on expanding its services in the R&D value chain through its integrated capacities and timely strategic investments and capacity expansion. Strong operating capabilities resulted in a steady healthy operating margin profile of 28-30% for the past five fiscals.

 

• Strong parentage: Syngene is a 54.72% subsidiary of Biocon as on Sep 30, 2024 and is likely to receive need-based financial support from the parent. Business operations of both the companies differ – Biocon manufactures and markets biopharmaceutical formulations while Syngene undertakes contract research for pharmaceutical, biotechnology, nutrition, agrochemical, animal health and consumer goods entities. While earlier, Syngene accounted for about one-third of the consolidated revenue and operating profit of Biocon, going forward, with higher contribution from the biosimilars segment, the contribution of Syngene to total revenue and profitability is expected to come down. Yet, Syngene will remain critical to Biocon, and hence need-based operational, managerial and financial support will persist.

 

• Healthy financial risk profile: Adjusted gearing was low at 0.03 time as on March 31, 2024, and should remain less than 0.1 time going forward, aided by healthy cash generation, prudent working capital management and internally funded capex. Debt protection metrics were comfortable, reflected in interest coverage ratio of 23.41 times in fiscal 2024. The company shall further undertake USD 50-60 mn annually to add to its existing capacities in order to meet the incremental demand which shall remain funded through its liquid surplus.

 

Weakness:

• Susceptibility to regulatory changes and increasing competition: The contract research industry is highly competitive on account of low entry barriers. Several large global pharmaceutical players are outsourcing contract research activities to India. Hence, more contract research organisations (CROs) may enter the fray, increasing competition and constraining pricing power of established players such as Syngene. Additionally, the company faces competition from CROs in China and Eastern Europe, which may have a broader portfolio of services. Furthermore, competition persists from captive R&D centres and new, smaller entities focusing on a particular therapeutic area. Nevertheless, the company benefits from its wide range of service offerings and strong clientele, apart from the early-mover advantage and long-tenure contracts with customers, partially offsetting the competition.

Liquidity: Strong

Syngene has strong liquidity, driven by a sizeable liquid surplus balances of over Rs 1,000 crore as on Sep 30, 2024 and estimated cash accruals of Rs 800-900 crore for fiscal 2025 which will be sufficient to cover for the payment of balance debt obligations, working capital requirement and annual organic capex plans of Rs 500-600 crore going forward. The bank limit of Rs 1,050 crore is sparingly utilised.

 

Environmental, Social and Governance (ESG) profile

CRISIL Ratings believes the ESG profile of Syngene supports its already strong credit risk profile. The pharmaceutical sector can have a significant impact on the environment owing to greenhouse gas emissions, water use and waste generation. Social impact is characterised by the impact on the health and wellbeing of consumers on account of its products and on employees and the local community due to its operations.

 

• Syngene has increased the share of power from green sources in its total energy consumption to 80% for fiscal 2024, thereby reducing carbon dioxide emissions by 21% in fiscal 2024 as compared to the previous year. Syngene is accredited with ISO 14001:2015 for its effective environment management system.
• The company has deployed water management practices to appropriately treat and reuse wastewater within its facilities. It saved 42% freshwater in fiscal 2024; a two-pronged approach is followed to conserve water including reducing freshwater consumption by recycling and reusing water, as well as supplementing fresh water through rainwater harvesting.
• Syngene has undertaken focussed efforts on waste reduction and recycling and 96% of total hazardous and non-hazardous waste generated from its operations got recycled in fiscal 2024.
• The company has implemented the gender diversity and inclusion policy, prevention of sexual harassment policy and corporate social responsibility policy. Gender diversity in Syngene is better than industry peers, with women employees comprising 26% of the total workforce in fiscal 2024.
• Its governance structure is characterised by the majority of its board comprising independent directors, the presence of investor grievance redressal mechanisms and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Commitment of Syngene to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to both domestic and foreign capital markets

Outlook: Stable

Syngene will continue to benefit from the expansion of its clientele and increase in time and scope of existing contracts.

Rating sensitivity factors

Upward factors:

• Improvement in the long-term rating of Biocon
• Sustained annual revenue growth of over 20%, led by improvement in the discovery and development services, and sustained operating profitability above 35%
• Prudent working capital management and healthy capital structure

 

Downward factors:

• Moderation in the long-term rating of Biocon or change in stance of financial support from the parent
• Lower-than-expected revenue growth, with sharp operating profitability reducing below 25% on a sustained basis, impacting cash generation
• Weakening of debt protection metrics due to stretch in the working capital cycle or large, debt-funded capex or acquisition

About the Company

Syngene is one of the leading CRAMS organisations in India. The company offers R&D services in medicinal chemistry and biology in the early stages of drug discovery, through process development and contract manufacturing of biotherapeutics for human trials. It offers integrated discovery and development services across multiple technology platforms, including small and large molecules, antibody-drug conjugates and oligonucleotides. The company has over 400 clients in the pharmaceutical, biotechnology, nutrition, animal health, consumer goods and specialty chemicals industries, including 13 out of top 15 global pharmaceutical companies. It has a team of over 6,000 scientists.

 

As on Sep 30, 2024, Biocon held 54.72% stake in Syngene, foreign portfolio investors held 20.72%, mutual funds held 13.58% and the balance was held by the public and others. The company is listed on the National Stock Exchange and the Bombay Stock Exchange.

About the Group

Biocon, set up in 1978, is India’s leading biopharma company. It is fully integrated and delivers biopharma solutions ranging from discovery to development and commercialisation. It has diversified revenue streams covering biosimilars, contract research, small molecules and APIs. As on September 30, 2024, the promoters held 60.64% stake in Biocon.

Any other information: Not Applicable