CFO’S FINANCIAL REVIEW

Performance Highlights FY19

FY19 has been another good year for Syngene. We reported robust revenue growth of 28% during the year. While we witnessed good performance across the board, with contributions from all the business units, growth was principally driven by improved traction in Discovery Services and our dedicated R&D Centres. During the year, we continued to build on existing client collaborations while at the same time entering into new collaborations, taking our total client base from 316 active clients in FY18 to 331 active clients in FY19.

Cost and Margin Overview

With regard to profitability, earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 16% to Rs. 6,119 Mn as against Rs. 5,266 Mn in FY18. EBITDA and Profit After Tax (PAT) margins for the year were 32% and 17% respectively as against 35% and 21% respectively in FY18. During the year, we saw a one-time pass through billing relating to the cancellation and close down of a planned client project. Excluding this pass-through billing, underlying, EBITDA and PAT margins were at 33% and 18% respectively.

The reduction in EBITDA margin compared to the prior year reflects increased investments in three key areas related to delivering our long-term strategy for shareholder value creation, namely increased investments in business development, safety and quality compliance. We see all three of these areas as important to meet rising customer expectations and to ensure that the Syngene brand is visible and easily accessible to potential customers around the world. In addition to the step-up in operational investment in the business, PAT margins were also impacted by additional depreciation on new assets and an increase in effective tax rate, due to unwinding of SEZ tax holiday in some parts of the business.

Capex

We continued our focus on increasing capacity and strengthening key capabilities, to meet rising client demand. During FY19, we invested a total of Rs. 5,909 Mn (USD 85 Mn) towards ongoing capex programmes, taking our total investment in fixed assets to around Rs. 24,447 Mn (USD 350 Mn). Reflecting these capex investments, depreciation for the year increased by 25% from Rs. 1,314 Mn in FY18 to Rs. 1,642 Mn. We plan to continue investment in capex over the next two years and expect to take our total asset base to Rs. 38,500 Mn (USD 550 Mn) by the end of FY21. This will include an investment of around Rs. 5,250 Mn (USD 75 Mn) at our upcoming API manufacturing facility at Mangaluru.

We continued our focus on increasing capacity and strengthening key capabilities, to meet rising client demand. During FY19, we invested a total of Rs. 5,909 Mn (USD 85 Mn) towards ongoing capex programmes, taking our total investment in fixed assets to around Rs. 24,447 Mn (USD 350 Mn)

Foreign Exchange Movement

As majority of our clients are located outside of India, nearly 94% of sales are denominated in foreign currency, principally USD. This leaves the company with a large exposure to the risk of adverse fluctuation in exchange rates. Such risks are managed by hedging between 50% and 100% of exposure over the coming 24 months and up to 100% of exposure for long-term fixed price contracts. These hedges are obtained through a combination of various derivative instruments such as ‘foreign exchange forward’ and ‘put option contracts’.

With the average hedged rate and billing rate at Rs. 69 per USD for FY19, we registered a foreign exchange loss of Rs. 19 Mn for the year. This loss compares to a gain of Rs. 739 Mn in FY18, when hedged rates were above by Rs. 3.50 per USD to the then prevailing market rates of Rs. 65 to a USD.

Special Economic Zone (SEZ) benefits

With many of our facilities in Bengaluru operating within a Special Economic Zone (SEZ), Syngeneenjoys tax holiday benefits from the Indian Government to the extent of 100% exemption from payment of income-tax for the first five years of operations, 50% exemption for the next five years and a further 50% exemption for another five years, subject to fulfilment of criteria as laid down in the Income-tax Act, 1961. With the expiry of SEZ tax holiday benefits in some parts of the business during the year, the average effective tax rate increased by 216 basis points to 20%.

Shareholder Value

Syngene is focussed on building long-term business sustainability through the efficient use of capital, strong profitable revenue growth and focussed risk management.

The strength of our balance sheet is evident in our net worth position of Rs. 19,684 Mn and net cash position of Rs. 3,396 Mn as on March 31, 2019.

In line with the Company’s Dividend Distribution Policy, the Board has recommended a dividend of Re. 0.50 per equity share of Rs. 10 face value.

Furthermore, to mark the completion of 25 years of successful operations, the Board has also recommended the issue of bonus shares in the proportion of 1:1 i.e. 1 (one) bonus equity share of Rs. 10, for each 1 (one) fully paid-up equity share, as held on the record date.

The dividend payment and the bonus issue are both contingent upon approval by shareholders.

Capital Expenditure

USD 350 Mn

Invested as of FY19

The strength of our balance sheet is evident in our net worth position of Rs. 19,684 Mn and net cash position of Rs. 3,396 Mn as on March 31, 2019.

Closing comments

Moving into FY20, we expect the good business momentum that we have gained to continue. The expansion of our relationships with strategic clients, along with healthy demand in Discovery Services and Biologics provide a strong platform for further growth. We will also continue to invest in safety, compliance and business development to enhance delivery across the business.

Finally, let me take this opportunity to thank all our stakeholders for their continued support and confidence in us.

Thank you,

M. B. Chinappa