Detailed Rationale

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

 

The ratings continue to reflect 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. These strengths are partially offset by the risk related to completion, stabilisation and scale-up of the ongoing capital expenditure (capex) and exposure to intense competition and regulatory risks.

 

The ratings also consider the continued healthy operating performance of Syngene, as reflected by strong revenue growth and operating profitability. The company registered revenue of Rs 1,718 crore in the first half of fiscal 2024, indicating a 22% growth vis-à-vis corresponding period in the previous year; led by the healthy growth across segments – discovery services, development services and dedicated centres. Growth was supported by increase in revenue from existing clients as well as acquisition of new ones. In addition to its existing long-term contracts with Bristol-Myers Squibb Co (BMS), Baxter International Inc (Baxter; rated ‘BBB/Stable/A2’ by S&P Global Ratings [S&P]) and Amgen Inc for its research business, the company also entered a new 10-year contract with Zoetis Inc for drug substance manufacturing in fiscal 2023, which contributed to healthy revenue flow. The operating margin remained healthy at 27.1% in the first half of fiscal 2024 and may sustain at 28-30% in the fiscal. However, the margin is expected to moderate marginally in fiscal 2025, post operationalisation of the manufacturing facility being acquired from Stelis Biopharma Ltd (SBL), before improving back to current levels over the next few years as the operations ramp up.

 

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 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.

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 over 60% from the research business and remaining from the development business in fiscal 2023. 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 (rated ‘A+/Stable/A1’ by S&P), Amgen (rated ‘A-/Stable/A2’ by S&P) 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 continuous healthy operating margin of 28-30% for the past five fiscals.

 

• Strong parentage: Syngene is a 54.6% subsidiary of Biocon (post the stake sales in September 2022 and February 2023) 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 0.16 time as on March 31, 2023, and should remain less than 0.2 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 22.37 times in fiscal 2023 and debt to earnings before interest, depreciation, tax and amortisation ratio of 0.6 time. The ongoing acquisition of SBL’s manufacturing unit is on track and should get concluded by the third quarter of fiscal 2024. The unit is being acquired on a slump sale basis for a gross value of Rs 702 crore and Syngene will spend up to Rs 100 crore to repurpose and revalidate the facility for its own use to manufacture monoclonal antibodies, funded entirely through liquid surplus and cash accrual; this should keep debt protection metrics at comfortable levels going forward as well.

 

Weaknesses:

• Risks related to stabilisation and scale up of ongoing capex: Over the past 2-3 years, Syngene has undertaken high capex towards commercialisation of the active pharmaceutical ingredient manufacturing facility in Mangaluru (Karnataka) and new research centres in Hyderabad. Also, the company announced acquisition of the biologics manufacturing unit from SBL, to get completed over the next few months. Additionally, the company has organic capex plans of Rs 500-600 crore annually towards adding laboratory space for future expansion of the R&D business and capability additions across other services. Syngene will remain exposed to risks related to stabilisation and ramp-up in production and services at the recently commercialised facilities as well as for the planned capex. However, its history of timely project completion provides comfort. Nonetheless, any time or cost overrun in the planned capex will be a key monitorable.

 

• 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 expected cash accrual of over Rs 850 crore in fiscal 2024 and healthy liquid surplus of Rs 873 crore as on September 30, 2023. While the liquid surplus will reduce post the completion of the ongoing acquisition for a consideration of Rs 702 crore plus additional Rs 100 crore outlay for repurposing the facility as well as for prepayment of debt undertaken in October 2023, it will still be sufficient to cover 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.

 

Environment, social and governance (ESG) profile

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 impact on the health and wellbeing of consumers on account of its products and on employees and local community due to its operations.

 

Key ESG highlights

• Syngene has increased the share of power from green sources in its total energy consumption to 75% for fiscal 2023, thereby reducing carbon dioxide emissions by 52,834 metric tonne in fiscal 2023 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 40% freshwater in fiscal 2023; 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 91% of total hazardous and non-hazardous waste generated from its operations got recycled in fiscal 2023.
• 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 27.5% of the total workforce in fiscal 2023.
• Its governance structure is characterised by majority of its board comprising independent directors, presence of investor grievance redressal mechanism 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 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 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 September 30, 2023, Biocon held 54.6% stake in Syngene, foreign portfolio investors held 23.55%, mutual funds held 9.09% and the balance was held by the public and others. The company is listed on the National Stock Exchange and the Bombay Stock Exchange.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Letter of credit and bank guarantee	NA	NA	NA	5	NA	CRISIL A1+
NA	Overdraft facility	NA	NA	NA	5	NA	CRISIL A1+
NA	Packing credit in foreign currency	NA	NA	NA	130	NA	CRISIL A1+
NA	Packing credit in foreign currency*	NA	NA	NA	10	NA	CRISIL AA+/Stable
NA	Foreign currency term loan	NA	6%	31-Mar-26	150	NA	CRISIL AA+/Stable

   *Fully interchangeable with cash credit