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Topline declines.. Focusing long term growth

* Suven Pharmaceuticals Ltd. (SPL) is a pharmaceutical research expert, primarily operating in Contract Development And Manufacturing Operations (CDMO).

* Suven's Q3FY24 revenue dropped to Rs. 213cr (-38.9% YoY) due to reduced demand in CDMO specialty chemicals and CDMO pharma. 

* The EBITDA margin declined by 240bps YoY to 32%, resulting in a 52.2% YoY decrease in PAT to Rs. 52cr, influenced by global de-stocking.

* SSPL is persisting with its capex expansion strategy, allocating Rs. 200cr to the Suryapet project and Rs. 40cr to the new R&D facility.

* The company is focusing on mid- to long-term growth opportunities, including facilitating R&D labs, Suryapet expansion, operational capacity expansion, and inorganic growth expansion such as M&As. Owing to continuing cyclical headwinds and higher valuations, we reduce the recommendation to "SELL" with a target price of Rs.571 based on 33x FY26E EPS.

Revenue de-grew on macro challenges

Suven Pharma’s Q3FY24 total revenues declined by 38.9% YoY to Rs.213cr, with CDMO Pharma & specialty chemicals reporting a degrowth on a YoY basis. CDMO Pharma de-grew 59% to Rs.53cr, while CDMO Speciality Chemicals reported a decline to Rs.84cr compared to Rs.192cr in Q3FY23 owing to industry-wide inventory destocking and the impact of COVID-related supply issues. Whereas, revenue from the formulation business has improved by 232% to Rs. 83cr. During the quarter, the SPL received the approval of three ANDAs, and commercialisation of these molecules has started. Despite an enhanced inflow of RFQs (requests for quotations), the company notes a time lag in customer conversion, which is likely to materialise in H1FY25. The management expects that near-term macro challenges will continue for the next few quarters but remains confident in medium- to long-term growth.

Margin dips.. Eyes new acquisitions

EBITDA margin dipped by 240bps YoY to 32%, resulting in PAT declining by 52.2% YoY at Rs.52cr, due to global de-stocking impact. The SPL has successfully completed the transition to the new management of Advent International and is expected to finalise a new five-year vision by the end of the year. The company introduced an ESOP scheme to boost employee benefits and retain talent. As part of the overall growth of the company, management is looking into the possibility of mergers and acquisitions and is currently evaluating a merger with Cohance Life Sciences.

Capex continues amid near term challenges

Pharma CDMO faces multiple challenges, like customer growth, which is tied to the clinical success of molecules; managing stock and inventory optimisation, being unable to predict the delay of the Phase 3 trial of molecules and its successful closure, etc. Further, in specialty chemicals, headwinds on industrywise inventory de-stocking are likely to continue for the next few quarters. Despite these headwinds, the formulation segment expects normal growth. SPL is continuing its capex expansion plan and has earmarked Rs. 200cr at the Suryapet project, and similarly, Rs.40cr is allotted to the new R&D facility.

Outlook and valuation

The company is focusing on mid- to long-term growth opportunities, including facilitating R&D labs, Suryapet expansion, operational capacity expansion, and inorganic growth expansion such as M&As. However, in the near term, due to continuing cyclical headwinds and higher valuations, we reduce the recommendation to "SELL" with a target price of Rs.571 based on 33x FY26E EPS.

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