Dear Friends,
We are recommending Buy on our Actionable ViewPoints "Suven Life Science" as per following:-
CMP: Rs 247 Target: Rs 296 (20% Upside)
Key Points:
Suven Lifescience: Potential out-licensing deal in near term; Maintain Positive view
· Weak Q2FY2019 performance: Suven Lifescience (Suven) reported a 22.5% decline in its sales to Rs. 89.5 crore during Q2FY2019. Operating profit declined by 33.8% to Rs. 24.4 crore. OPM declined by 464 BPS to 27.3%. Profit for the quarter declined by 32.2% to Rs. 18 crore. The quarter's performance was impacted on account of raw-material supply issue from China, which management has said is resolved (along with its clients), thereby indicating stable H2FY2019 performance.
· R&D spends to peak out in FY2019; High potential of out-licensing deal: Suven's two molecules, namely SUVN-502 and SUVN-3031, are currently undergoing clinical trials, i.e. SUVN-502 will complete its PH-II trials by mid CY2019 and SUVN-3031 will commence Ph-II in CY2019. As per management indication, we feel R&D spend will be at its peak in FY2019 and will be flat thereon. This will help improve margins and earnings leading to improvement in return ratios. Moreover, management is looking for out-licensing partner for SUVN-502 (likely by Q3FY2020E, depending on success of clinical trials) and will not incur further cost for studies on its own.
· Prudent policy of expensing R&D through P&L, sturdy balance sheet: Suven follows a prudent policy of writing off R&D expenses in the year of occurrence. In addition, it has not resorted to borrowings to invest in R&D development. The company utilised its strong cash and bank balance for capex and innovation, which limits the financial risk. Management plans to do a capex of Rs. 270 crore, spread over 18 months (Rs. 70 crore spent in H1FY2019).
· Maintain Positive view with 18-20% upside: We have a Positive view on the stock due to the company's clear focus, visibility in sales growth, improving profitability and potential out-licensing deal. We see a potential upside of 18-20% over the next six months.
· Risks: Success/failure of SUVN 502 molecule is upside/downside risk respectively.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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