Behind the numbers: How Syngene’s CFO is pioneering growth during sombre times

CFO India recently interviewed Mr. Sibaji Biswas, Syngene’s CFO, to explore factors behind its impressive 19% Q2 growth.

Syngene’s remarkable performance in the second quarter has garnered significant attention, as the company achieved a substantial increase in net profit compared to the previous year. This impressive financial achievement has undoubtedly piqued the interest of many, and we had the opportunity to sit down with the CFO of Syngene, Mr Sibaji Biswas, to gain insights into the various factors that contributed to this success and to delve into the company’s financial strategy and growth plans.

Q. What specific factors contributed to the increase in consolidated net profit for the second quarter compared to the previous year? Were there any particular revenue streams, cost- saving measures, or strategic decisions that significantly contributed to this?

Sibaji: In the second quarter, as well as throughout the first half of the year, our business experienced remarkable growth. We achieved a substantial year-on-year growth rate of nearly 19% in the second quarter, compared to the corresponding quarter in the previous year.

Furthermore, the growth witnessed in the first quarter was equally impressive.

This robust growth can be attributed to various facets of our business, with a particular emphasis on the pivotal role played by our development and manufacturing segments, especially in the realm of commercial manufacturing for biologics. Notably, this growth trajectory mirrors the dynamics of the manufacturing industry, whereas operations scale up, the benefits of operating margins and operational leverage become more pronounced. Our focus on cost optimization also played a significant role, with a clear commitment to delivering the margins we’ve promised.

Our overarching leadership perspective centers on maintaining EBITDA margins close to 30% across the entirety of our business. To achieve this, we methodically optimize our various expense lines, ensuring they are aligned with this target. In essence, our consolidated net profit increase for the second quarter compared to the previous year can be attributed to a multifaceted approach. However, the driving force behind this growth is primarily our biologics- driven commercial manufacturing segment, where enhanced operating margins have made a significant contribution to our success.

Q. Profitability often entails a close analysis of the financial statements and operations. Could you elaborate on any challenges or risks that the company had to navigate during the second quarter, and how the finance team managed to mitigate or overcome these obstacles to achieve profitability? Are there any potential financial challenges on the horizon that you are proactively addressing?

Sibaji: 95% of our revenues are denominated in foreign currencies. So, one of the key financial challenges we consistently face is managing our Forex exposure effectively. To address this challenge, our finance team has implemented a robust Forex management policy, encompassing both receivables and payables.

In the context of receivables, we hedge 100% of the next 12 months’ expected income and 50% of the subsequent 12 months. This approach allows us to essentially lock in the expected rupee equivalent of our foreign currency earnings at the start of each fiscal year. Over the past year, we have witnessed significant fluctuations in foreign exchange rates. For instance, looking back 12 to 14 months, the exchange rate for the U.S. dollar ranged from 75-76, and it now stands between 83-84. These fluctuations impact not only our top-line revenue, as we convert Forex revenues using the spot rate, but also our expense lines. Many of our raw materials are sourced internationally, and there are international aspects of our business where expenses are incurred in various foreign currencies.

Our approach is to take a comprehensive view of the entire Forex exposure landscape and ensure we are adequately hedged. By doing so, we can predict and factor in any impacts arising from currency fluctuations into our financial forecasts. This proactive management of Forex risk is fundamental to maintaining stability in our financial operations.

Looking at the challenges we’ve faced during the second quarter, managing these Forex exposures has been a critical component of our financial strategy. In response, we have diligently adhered to our established hedging practices, ensuring that any currency-related impacts are well-managed and accounted for in our financial planning.

As for potential financial challenges on the horizon, we recognize the ever-changing nature of global economic conditions and the inherent uncertainties that come with it. We are committed to maintaining a proactive stance in addressing these challenges as they arise. Our finance team remains vigilant and adaptable to evolving financial landscapes, allowing us to navigate potential obstacles effectively.

Q. Can you provide insight into the company’s financial strategy for managing expenses and ensuring cost efficiency, particularly in the face of rising expenses?

Sibaji: Certainly, our financial strategy for managing expenses and ensuring cost efficiency can be broken down into three key components:

Emphasis on cash flow management: Our primary focus, especially during periods of uncertainty, is prudent cash management. We place great importance on managing our cash flow effectively, which allows us to fund our organic growth initiatives without having to seek external financing. Our expansion plans for the current year and the next five years, as outlined in our long-range plan, are all intended to be financed through our internal cash flow generation. In cases where we undertake acquisitions, we may have to tap in external funding. We also maintain a rigorous approach to credit management, ensuring the quality of our revenue streams and closely managing working capital, including receivables and payables. By phasing our expenditures in a risk- controlled manner, we aim to consistently generate cash surplus from operations in most quarters.

Strategic expense management: We adopt a clear stance on expense management. Some expenses are strategic in nature, such as investments in building both commercial and scientific capabilities. We do not compromise on these expenditures because we hold a long-term perspective and understand the importance of developing our organizational capabilities to align with our strategic priorities. While uncertainties in business are often short-term, we remain committed to our long-term view. We are resolute in making the right investments to ensure our organization can meet its strategic objectives. However, for discretionary expenses, we maintain a rigorous and frugal approach, constantly seeking optimization in every possible aspect of our operations.

Debt management: The third component of our strategy revolves around debt management. We are dedicated to keeping our debt levels as low as possible on our balance sheet.

Historically, our debt-to-equity ratio has been very low. Even in the most recent quarter, we took steps to reduce and ultimately eliminate the ECB loan from our balance sheet. Our overarching objective is to minimize the presence of debt in our financial structure and, where feasible, aim for a near-zero debt position. While taking on debt can be a viable strategy for expansion in certain circumstances, our approach has always been to maintain minimal debt on the balance sheet. We prefer to manage the business primarily through internal cash generation, as previously mentioned.

Q. You have recently acquired a multi-modal facility from Stelis Biopharma. What financial implications and strategies are associated with this acquisition, and how does it fit into the company’s growth plans?

Sibaji: When evaluating our options for expansion, we faced the choice between organic growth and acquiring an existing facility. The Stelis facility, known as Unit 3, presented itself as a compelling opportunity due to its favorable price and, more critically, its readiness for use.

While originally designed for vaccine production, with some necessary adjustments, it can effectively accommodate the production of antibodies. This means we can have the facility up and running by the next financial year, providing us with a substantial speed- to-market advantage.

One key advantage of this acquisition is that it was entirely funded from our internal cash reserves, obviating the need for external borrowing. However, operating such a large facility does come with associated costs. The facility has a capacity of 20,000 liters, with room for an additional 20,000 liters to be added.

These operating costs are expected to have a temporary dilutive effect on our margins over the next couple of years. Nevertheless, we’ve provided guidance to the market that this facility is anticipated to achieve cash break-even by FY27. Furthermore, by FY29, it should no longer have a dilutive impact on our margins. In practical terms, this means that, by FY27, the facility is projected to generate sufficient cash to cover all its operational expenses.

The acquisition of the multi-modal facility from Stelis Biopharma is a strategically significant move that seamlessly aligns with our company’s growth plans. Our focus on biologics and manufacturing represents a high-growth area, pivotal to our overarching strategy for the upcoming years. Notably, our existing manufacturing capacity is already operating at full capacity, necessitating expansion to accommodate the increasing demand.

Q. How do you plan to capitalize on the strong sector fundamentals and continued growth, especially considering the anticipated moderation in growth in the second half of the year?

Sibaji: To leverage the robust segment and sustain our growth trajectory, particularly in light of the expected moderation in the latter half of the year, we have a comprehensive strategy in place. We have guided for an impressive 15% constant exchange rate growth, resulting in substantial revenue expansion. It’s important to acknowledge that minor fluctuations of 1-2 percentage points are inherent in any business.

While most parts of our business are thriving, one specific sector, early-stage biopharma companies, faces challenges due to funding issues in the biotech industry. This is not unique to us; our peer companies worldwide are also expressing similar concerns regarding their performance in the second half of the year. However, we remain optimistic about the biotech funding landscape improving. Recent data indicates an upward trend in biotech funding, gradually stabilizing at pre-pandemic levels. Typically, it takes a few quarters for these improvements to translate into increased business opportunities for us.

Additionally, we’ve noted strong demand signals from major pharmaceutical companies, driven by factors such as inflation, macroeconomic trends, and geopolitical factors. Yet, it’s important to understand that within the big pharma domain, the conversion of demand signals into concrete business opportunities is a lengthier process due to their intricate procedures and multi- tiered supply chain engagements.

Our optimism is twofold. Firstly, we anticipate a positive shift in the biotech funding environment, which should lead to expanded business prospects for us. Secondly, we are hopeful that the increased demand from big pharma will materialize in the upcoming financial year. To fortify our position, we continue to invest in capabilities and facility enhancements.

While we initially projected high teens growth, our current outlook leans towards mid-teens, with minor variations. Nevertheless, our steadfast long-term strategy remains intact, and we hold a positive outlook for the future of our business.