Business Analysis 7: Sequent Scientific
Sequent Scientific has been quietly making a killing in the market. There's an interesting story going on due to its recent merger announcement.
Sometimes, groping in an ocean to find the best seafish, fishermen miss out on the sure shot opportunity (Read Investors instead of Fishermen). Sequent Scientific has been quietly making a killing in the market. We will study about this business in today's content.
There's an interesting story going on due to its recent merger announcement.
They are in the animal healthcare industry catering to 2 segments -
1. Healthcare products for production animals
2. Healthcare products for companion animals
Revenue mix as of Q2 FY25
Formulation - 77% + API - 23%
Before going deeper into the merger, let's understand the business of Sequent Scientific in more details.
On the formulation side, they have 1000+ FDFs with 90+ countries marketing presence. On the API side, there are 32 commercial APIs with 50+ countries marketing presence.
They are on a 3 year transformational journey. Being the largest animal healthcare company in India, Sequent previously demerged its human API business into Solara Active Pharma which is also a listed entity. And in the future also, they may discontinue some of their businesses.
Let's come to the merger part, the most interesting part which ultimately may create value for the whole business.
Before crunching on numbers, let's understand the business of Viyash first. They are into the same business, the animal healthcare. There are 200 scientists, 16-18 active MPD projects, 50 active DMFs, 28 DMFs already filed by their name. It's a globally competitive player growing at a rapid pace, more than 34% CAGR since 2020 with great margins. Obviously, it's a good opportunity for Sequent.
Merging with Viyash, the manufacturing capacity will be 5x higher, R & D team size will be 6x larger, no of USFDA facilities will be 9x higher and 8x higher will be the new product fillings.
Combined entity will have 2x revenue and 2x EBITDA. So it's a big merger. Let's see in more details.
Manufacturing capacity
Viyash - 2040 kl + Sequent - 370 kl = 2410 kl
Manufacturing facilities
Viyash - 9 + Sequent - 7 = 16
R & D team size
Viyash - 200+ + Sequent - 35+ = 235+
USFDA approved units
Viyash - 9 + Sequent - 1 = 10
Also Viyash is expanding into other markets such as oncology and nephrology. They are catering to $1 bn market opportunity with only 40% of molecules. They are considered among the best animal healthcare companies globally alongside Lonza, Catalent, Patheon etc. The top 10 players are holding around 45% market share in the global animal healthcare market.
Valuation
As per merger announcement, Q1 revenue of Viyash is 340 cr and Sequent is 390 cr. So the total revenue would be 730 cr. On annualized basis, it would be around 2900-3000 cr.
Q1 EBITDA of Viyash is 58.14 cr and Sequent 48.36 cr. So the total would be 106.5 cr (14.58% in percentage term?). On annualized term, it would be around 400-450 cr.
Let's do a rough calculation for valuation purpose. So the annualized revenue in FY25 would be around 2900-3000 cr with an EBITDA of 400-450 cr. How many multiples will you give for such financials? Current market cap of Sequent - 5100 cr. EV/EBITDA of Sequent currently going on - 27/28. So, the revenue multiple is just below 2x based on TTM. Total debt of the combined entity would be around 660 cr after merger. Let's exclude the cash part for now. The EV would be around 5700-5800 cr. So EV/EBITDA of the combined entity would be around 12-14. Giving such multiples to a company which targets to grow at an early double digit over the next 3 years would be too conservative I think. As per their guidance if they can grow their topline around 12% with an EBITDA margin of 17% then the numbers would be around 4214 cr and 716 cr respectively by FY28. EV/EBITDA considering the numbers at the end of the 3 years would be 8. There's enough upside for this stock still available at a fair price. It should trade around 8000-10000 cr market cap range maybe within a year.
Some positive notes
Global animal healthcare market was at $38 bn in 2023 and growing at 8% CAGR to reach $51 bn by 2027.
On the other hand, Indian animal healthcare industry is at $2.1 bn in 2024 and growing at 12.4% CAGR to reach $4.3 bn by 2030.
If the market is growing at such a faster rate, how can it grow at an early double digit? Am I missing something else here?
They are doing 50-60 cr capex in FY25. There are increased demand for animal protein higher awareness of diseases, increased pet ownership etc. All will drive the industry further. Why wouldn't the company grow more than early teens?
Please don't take it as a buy or sell call. I might be wrong. This is just for educational purposes.
Thanks for reading
Rabi
Take care
Disclaimer: I'm not SEBI registered. This content is for educational purposes only. Do your own diligence.