INVESTMENT RESEARCH

FUNDAMENTAL COVERAGE - SEQUENT SCIENTIFIC LIMITED

Dated : 05th March 2018
BUY Investment Rationale
Price ` 84 DEMERGER - Focus on value creation in Animal Healthcare (Alivira) -
Fair Value 130 ROBUST GROWTH
Upside 55%
Div Yield -
In order to have better management and clear focus of its business activities, BOD approved a draft
Tenure 1 YEAR
Composite Scheme for De-merger of Human API business of SeQuent and Commodity API business of
Sensex 33730.36
Strides Shasun Limited to Solara Active Pharma Sciences Limited (Solara).
Nifty 10343.85
B / S&P BSE
Group/Index Rationale behind hiving off Human API
500
Commodity API business & Human API business, being B2B businesses, require a differentiated
strategy and direction to grow and deliver value.
Stock Details The Human API business which though profitable, will require significant CapEx to build scale and
M.cap (` in cr) 2045 exigencies
Equity (` In cr) 48.75 While the differentiated business model of focusing on old, small volume molecules make the
52 wk H/L ` 147/65 business highly profitable, with annualized revenue of ` 300 crores, the business is sub-scale
Face Value ` 2.00
NSE code SEQUENT Segregation of Human API Business from animal healthcare business of Sequent will allow
BSE code 512529 concentrated focus by SOLARA management on the Human API business & SEQUENT management
on animal healthcare business.
Key Valuation Ratios The unbundling of Commodity API Business & Human API Business and consolidation into
RONW 3% SOLARA will create an active pharmaceutical ingredients company in India with critical size,
P/E 60 and is expected to unlock value by enabling the business activities to be carried out with
P/BV 2.0 greater focus and specialization for sustained growth.
EV/EBIDTA(TTM) 19.15
Demerger of the Human API Business into Solara Active Pharma Sciences Limited which will
also house the Commodity API Business of Strides Shasun Limited, will help achieve critical
IN ` scale & size and emerge as one of the largest API companies from India. This decision, to part
Key Financial Data with the business from Sequent was taken considering the dynamic regulatory landscape in
EV (`in cr) 2413.52 API industry along with the growing opportunities for a pure-play API player from India. The
demerger awaits the final nod from the National Company Law Tribunal, Mumbai, and will
BV (`in cr) 41.07
be value accretive for its shareholder.
NW(`in cr) 1001.10
EPS (TTM) 1.40

Share Holding Pattern

Future Strategy

Promoter Others

43%
57%

Corporate Governance Transparency Ratio's

Year End 201703 201603 201503 201403
Tax Rate % 2.50 (18.60) (40.50) (0.53)
Receivable days 101.56 113 90.93 73.43
Div. Payout % - - - -

Source: Google

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Business Highlights- Q3 FY 18

Business grew significantly with Europe growing by 25% and Brazil by 38%
Established Alivira presence in France, with the largest EU market size of over $1.5Bn. First commercial sale
expected in 1Q19
Pet division launched in India
First commercial API sales in US. This business shall drive growth in FY19
Re-strategized the Emerging market business on account of forex availability issues in key African markets

Regulatory Filings and approvals

Completed a total of 11 filings in US from Vizag USFDA plant

Completed a total of 10 CEP filings, 5 approvals as on date
Filed 4 products in EU and 14 products in emerging markets, resulting in 113 registrations in EU and 120
registrations in emerging markets

GROWTH DRIVERS

Increase in domestic demand: Growth in middle class population with increase in awareness levels,
rising per capita Income, change in lifestyle due to urbanization and increase in literacy levels, demand for
advanced medical treatment is expected to rise.

Rise in outsourcing activities: Increase in the outsourcing business to India for generics, CRAMS,
Clinical Data Management, research activities would drive growth of the Indian Pharmaceutical Industry.

Growth in healthcare financing: Introduction of products such as health insurance policy, life
insurance policy and cashless claims has resulted in increase in healthcare spending, which in turn will benefit
the pharmaceutical industry.

Demand from emerging segments: Some of the emerging segments such as contract research and
development, biopharma, clinical trials, bio-generics and pharma packaging are expected to drive growth of
the Indian pharmaceutical industry.

RESULTS ANALYSIS
Animal health business under Alivira, which is the continuing business, has gained further traction
with a YTD growth of 29.4%. Margins also continue to expand and achieved a 10.1% EBITDA margin
during Q3. The growth during the quarter was primarily driven by acceleration that we achieved both
in Spain and Brazil, two of its strategic markets, even as company continue to consolidate in other
markets. Initiatives undertaken to develop new Business and R&D pipeline will further accelerate
growth in sales and more importantly expansion in margins especially as its Vet API business scales in
the key US market.

Graphical presentation Q3FY 2017-18 & Nine Months Results (CONSOLIDATED)

Results Snapshot ` in crores

Quarter Ended % Change % Change Nine Months Ended
Quarterly & Yearly

Particulars % Change
Results Analysis

Q3 FY 18 Q2 FY 18 Q3 FY 17 (Q-O-Q) (Y-O-Y) Sep-17 Sep-16

Revenue 224.14 214.06 207.70 4.71% 7.92% 630.83 484.81 30.12%
EBITDA 20.21 25.31 12.51 -20.15% 61.55% 65.86 30.61 115.16%
EBITDA % 9.02% 11.82% 6.02% - - 10.44% 6.31% -
PBT 0.59 8.10 -8.58 -92.72% -106.88% 11.21 -21.04 -153.28%
PBT% 0.26% 3.78% -4.13% - - 1.78% -4.34%
PAT -3.02 4.27 -10.10 -170.73% -70.10% 1.83 -25.36 -107.22%
PAT % -1.35% 1.99% -4.86% - - 0.29% -5.23%
EPS -0.24 0.13 -0.34 -284.62% -29.41% -0.25 -1.06 -76.42%

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Company Overview

SeQuent is looking towards the future with courage and confidence, because of the critical role it can play to
help make a difference in global economic progress and social wellbeing. Ever since inception in 2002 SeQuent
has emerged as an integrated pharmaceutical company with a global footprint, operating in the domains of
Animal Health (API and formulation) and Human health (API). Company have branded Animal Health business
as Alivira Animal Health with a singular focus to create value in the global animal health space and cater to
unaddressed global market requirements and focus on products for livestock, poultry and companion animals.

Risks & Concerns

 Pharmaceutical companies face the regulatory risk of approving each of its products and manufacturing
facilities by the respective regulating body of the country in which it plans to sell its drug. Also regulatory risks
emanating from quality issues could also have a significant impact on the earnings visibility of pharma
companies.

 Due to low costs, qualified staff and extensive production and research units India is becoming more and
more of a major pharmaceutical location. More companies from the developed economies are setting base in
the country. Also companies from Asia are continuously seeking to tap the global markets. All these factors lead
to stiff competition in the pharma industry.

 Any disruption in provision of an un-interrupted supply of Codeine by the Government could impact company's
financials.

 Delay in commencement of new tablet manufacturing facility along expected timelines and within the
estimated costs, and stabilization of the facility in line with current plans if doesn’t happen properly could
result in cost overruns and impact the financials of the company.

 Any adverse changes in Patent product pricing, Pharma Marketing Policy, Patent Act or significant shift in
government view on Product Patents could affect Astrazeneca. Also any adverse changes in Government
policies on import of medicines in bulk or tablet form and those on clinical trials or associated compensation
rules could hurt its sales and revenues.

Valuation Conclusion

Demerger of the Human API Business into Solara Active Pharma Sciences Limited which will also house the
Commodity API Business of Strides Shasun Limited, will help achieve critical scale & size and emerge as one of
the largest API companies from India. This combination will catapult SAPS to be one of the largest standalone
API companies in the country supplying commodity and niche APIs globally. The business will create value
for its stakeholders with its differentiated strategy and highly compliant manufacturing facilities.

Company has clocked robust revenue and record growth in profitability during Q2 FY 18, demonstrates the
successful outcome of strategies that company embarked upon few years back.
On business front, Alivira now contributes to over 65% of the consolidated revenues. Geographically, Europe
has contributed to more than 50% of the Alivira business and with the recent US FDA approval for Vizag
facility, company expect the US business to ramp up exponentially & also gaining sustainable traction in our
Brazilian and Turkish business.

So, taking these into consideration, Low debt equity ratio and 57 % promoter stake, the
share can move to a level of about ` 130 in next one year. Therefore, we recommend to
BUY.

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