Suven Life – Embedded Triggers Triggered

Last year I wrote on Suven Life Sciences, also I did some secondary level maths to get a sense of returns an investor could get buying the business at then market cap (~2000 INR Crores or 400 Million USD) and exiting in 2024

See Snap shot below

Suven-1

The base case CAGR didn’t excite but reading management commentary compelled me to take a tracking position in model portfolio

Over to this year

One thing in AR gave me a Jeff Bezos moment

Suven-2

For the first time management was sounding optimistic (this is coming from a management which is very conservative on record)

Emphasis mine

Management views on past

Despite having grown the business every single year across the last five years, our business sustainability has been consistently questioned. We are perceived as a high risk service-based business marked by volatile quarter on quarter earnings because successful project completion may not necessarily translate into repeat orders if the project does not carry through at the innovator’s end

Management views on Future

The big message that I wish to send out is that this reality is likely to change. The volatility in our business model may moderate extensively following the commercialisation of three products at the innovator’s level followed by consistent multi-year offtake coupled with growth from our annuity driven specialty chemicals business

Business Segments

NCE Segment

Emphasis mine on optimism in management commentary

Suven’s prospects appear bright considering the relative absence of effective therapies for these diseases in the US

SUVN 502. For this molecule, we completed Phase-Ib trials and commenced preparations for the Phase-IIa (POC) trial. We hope to initiate patient trials during the second half of the current year and are hopeful of monetising this molecule post successful completion of the study in fiscal 2017

The pipeline looks strong with years’ worth of work and money (R&D) getting set for commercialisation

Suven-3

CRAMS

Three products from the pipeline moved to launch stage, commercial volumes for these products are expected to be generated FY17 onwards

To make a sense of this each of could bring 50-100 Crore annuity business if the Innovators working with Suven are able to commercialise them post phase 3

Suven-4

Suven ended FY15 on an optimistic note. In the base CRAMS business pipeline, We have 52 projects catering to Phase-II products, the highest in our existence. A single project moving to Phase-III can result in a significant volume increment and enhanced profitability

Royalty (Marketing Licence)

During the year under review, Suven filed three ANDAs in collaboration with customers; a maturity of these ANDAs could lead to additional revenues

Now it was proved that I was a sitting duck, as market cap zoomed

Suven-5

Sticking to my old assumptions now the base CAGR is now even lower

See snapshot at 15X exit

Suven-6

But should I not change my mind knowing management has always under promised and over delivered and have given enough optimistic indications this year to shareholders

If I don’t I would be plagued by consistency bias

Also I am now comfortable that SUV 502 is not the only joker in deck, the company is building a sustainable pipeline and one of them would succeed in due course

5 out 1 makes it, if not SUV 502, one out of others would make it

Suven-7

The other factor which made me change my mind

Prof Bakshi teaches us look for business which have staying power

Suven-8

and why do I say so ?

Management indicated last year that they may not get repeat order which would reduce their topline and bottomline inFY15

See highlighted text, the business was able to not only offset 74% de-growth but also grow its core business at fantastic rate

Revenue from operation (net) grew marginally by 3% from INR 513 crore in 2013-14 to INR 529 crore in 2014-15. This was primarily due to healthy growth in the core CRAMS business, which grew by 44% over the previous year, compensating the 74% de growth in one-off pre-launch revenue.

Final thing that changed my mind

Suven-9

So I changed my base assumption but I still be on conservative side

  • Improved growth of CRAMS business ~20% constant (50% lower than current year)
  • NCE segment becomes revenue generating ( USD 80 million in year of exit)
  • Exit multiple of 18 (reasonable for a 20% growing business and earning 18% margin)
  • Now my CAGR return is ~15%

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Suven-12

15% works for me on conservative side, If Mr Jasti delivers more which he could that will be bonus for shareholders

Side Note – All of promoter holding moved into trust – Would lead to less squabble between sisters when Mr Jasti is gone (I pray for his long life)

Suven-11

Disclosure – Suven in portfolio last buy made a week ago

This is not a recommendation and I am not a registered SEBI research analyst, due your due diligence

14 comments

  1. Selvakumar says:

    Hi Vivek, I am a regular reader and appreciate your work. Please continue this work and it is very insightfull. I have one question on SUVEN. Suven’s leading molecule was not listed in clinicaltrials.gov web site. does it mean there leading molecule phase 1 is done in different geography other than US?

  2. Kalyan says:

    Vivek – What is your read, post Q1? I know, we are talking about just 1 quarter but it looks disastrous kind of results. if you look at Q4’14 and Q1’15 together, the kind of modest 10% growth which Venkat Jasti promised looks impossible now…I think that there is going to be a sell off in this counter…your views please

    • Vivek Bothra says:

      Hi Kalyan,
      Comparison to what they achieved last year would be stiff, So in one sense expected this quarter to be mild, Phase 2 and Phase 3 expenses are pretty high during drug discovery so the R&D cost would continue to be high(I may have erred on my estimates here), next phase for Suv-502 itself would cost 80-90 crores given by number of patients it is being tried on
      As Mr Jasti clarified in AR core business grows only when innovators companies pipeline moves and that has clearly not happened this quarter
      On stock price your guess is as good as mine,I anyways expect this counter to be range bound this FY

      Key risk for me is further dilution of equity if core business is not able to generate enough cash to fund trials or they don’t find an innovator partner till FY17
      Hope it helps

  3. fedrick says:

    Dear Vivek,
    A very good analysis of Suven. The more I read your blog, the more I am amazed at your analytical and communication skills, may you continue the good work and educate beginners like me.
    My question though is not on Suven but rather on Portfolio Allocation. I keep reading other blogs and on twitter, where experience investors highlight the importance getting your portfolio allocation right will go a long way in making a worthwhile return (as Mr. Basant Maheshwari advocates, a 3% allocation that gives 100X will make a career, however a 30% allocation that gives 100x will make a lifetime).

    So how can I apply the same for myself, unlike other investors, I don’t have a corpus to start with (apart from my regular SIP in MF’s). When I do come across a name, which I am convinced about, how do you think one should invest. Say for example, I have 5k per month to invest in direct equities, how do I allocate within my list of shortlisted stocks, should I do an SIP in these understanding that current prices may not play a big impact if I hold the stocks for the long term (say 10 years or more) or wait an accumulate funds and invest when the market provides an opportunity.

    The reason I ask is I don’t know what my portfolio size will look like at the end of 5 years (my main savings go the MF’s and only the leftover funds will be invested in direct equities) and hence how do I ensure I make a sizeable allocation to my list of shortlisted names, and at the same time not be too concentrated as well.

    I do hope you understand my question, as even I have not been able to put it across as clearly as I hoped so

    Some feedback on this will be highly appreciated.

    Many Thanks
    Fedrick

    • Vivek Bothra says:

      Hi Fedrick,
      Thank you for your kind words.
      On Allocation – If you ask Charlie Munger he would say 3 companies are enough for diversification. But remember he is THE Charlie Munger, he knows the the ins and outs of the business
      So allocation is simply a function of conviction – The more convinced about odds being in my favour the more I will allocate in a business I understand
      Now coming to specifics, your scenario with direct SIP in equity of about 5k, which is about 300K (3Lacs) in 5 years, without knowing your personal situation it is difficult to answer, but I would butt in
      There are two approaches
      A. Build a position in 2-3 business slowly through SIP in three year you would have a decent allocation of about 30% in each of them
      B. Don’t buy anything, do in depth research on these 3-4 businesses, slowly accumulated funds in a recurring FD and then time is right – Pull the trigger

      Approach A is easy but Approach B will help you become a better investor
      Hope this helps !

      • fedrick says:

        Guess for a beginner like me, Option A will be more beneficial in terms of a risk-reward perspective. As one gets to gain more experience, one should try and gravitate to Option B. Many Thanks for your reply and very best for your future endeavors

  4. harish says:

    Dear Vivek, does d color in the portfolio_ in d link given_ suggest that you have completely exited symphony? Garish

Leave a Reply to harishCancel reply