Syncom Healthcare IPO Analysis

Investments can be avoided in the initial public offering of Syncom Healthcare, which is engaged in the manufacturing and marketing of pharmaceutical formulations in the domestic market. At the price band of Rs 65-75, the offer is priced at 23-26 times its likely FY10 per share earnings on a post offer equity base. This seems expensive considering that many of the top tier pharmaceutical companies with better business fundamentals, market reach and growth potential are available at much lower valuations. The company's presence in a highly competitive market and it's relatively low experience in manufacturing operations also necessitate a cautious outlook .

Company overview

Catering primarily to the domestic market, Syncom manufactures and markets pharmaceutical formulation under its own brand name in four product segments — generics, OTC (over the counter), ethical and herbal. The company also undertakes contract manufacturing for various pharmaceutical formulations, neutraceutical products, food supplements and cosmetics for domestic companies such as Lupin and Piramal Healthcare. Further, it recently added other companies such as Wockhardt, Klar Sehen and Canixa Sciences to its existing list of contract manufacturing companies.

Prospects, challenges

Though the growth undercurrents in the domestic formulation business are getting stronger, the presence and increasing focus of bigger players on the domestic market may make it doubly challenging for Syncom to chart its growth path; the bigger players cater to a chunk of the market already. The rest of the market is characterised by many small and unorganised players.

It will be Syncom's distribution reach, brand presence and product launches that would help it scale growth in future. While the company has scored decently on these counts so far, growing its revenues at a compounded rate of over 42 per cent in the two years after it set up a manufacturing facility in Dehradun, it was on a low base and driven by volume increase. High competitive pressure and price sensitivity of the domestic market appears to have kept realisations capped, suggesting this could very well be the way forward too.

The company derives a significant share of its revenues from too few a clients; the top ten made up over 69 per cent of its revenues last fiscal. While this per seisn't reason enough for concern — such high dependence is quite common among companies with smaller scales of operation — what may be discomfiting is its working capital management.

High dependence on a handful of clients and little bargaining power appear to have strained the company's cash flows, with its working capital cycle increasing to 198 days in FY09 from 153 seen a year earlier — over 57 per cent of the total debtors exceeded six months. While an extended credit cycle to some extent is typical of the OTC segment, the company's revenue exposure to the segment was just about 24 per cent in the last fiscal.

via BL