Jonathan Hunt - Chief Executive Officer and M.B. Chinappa - Chief Financial Officer of the company addressed the call:

Highlights of the call:

Sales for the quarter increased 4% to Rs441 crore, against Rs 425 crore. This reflects steady growth in Discovery Services and Dedicated R&D Centers verticals, offset by more muted performance in other businesses, Development Services and Manufacturing Services.

Both these verticals were impacted by rephasing of projects, either as a consequence of a later-than-expected project start or changes in client specifications. The impact of this is that these projects will now get completed later in the year and consequently the management expects growth rates to pick up over the next couple of quarters.

EBITDA and PAT grew faster than revenue in the quarter with EBITDA up by 11% to Rs 142 crore, PAT up 9% to Rs 72 crore.

The margin performance is good, coming in well within expectations for the year, EBITDA recording a margin of 32%, PAT margin coming in at 16%. So, both measures of profit were in line with expectations for this part of the year.

The management informed about the successful completion of the USFDA audit of Human Pharmacology Unit in Clinical Development business. This is the seventh successful USFDA inspection for Syngene and highlights the robust systems and processes it has in place.

During the quarter the company expanded its research operations. It plans to open new research facility in Hyderabad later in this quarter. It has selected Hyderabad because of the excellent infrastructure, favorable ecosystem for life sciences research and the availability of an excellent scientific talent pool. The facility is in the final stages of construction and is on track to open this quarter. It plans to expand it in a phase wise manner, with Phase-1 opening around 50,000 sq.ft. of lab space and that is enough space for around 150 scientists covering chemistry and also biology.

After that, it will have Phase-2 available. But it does not necessarily mean that it will start operations in Phase-2, but Phase-2 would allow it to double the headcount, double the floor space. So, it just gives the company some near-term headroom for expansion should it see client demand.

And the second thing it will do is, it will allow it to decompress some of the lab space in Bangalore by moving some of that work to Hyderabad. That is a good thing in terms of creating a great working environment for scientists and also making sure that it has a very operationally efficient plant. One or two of its labs are a little bit more crowded.

Q1 started on a positive note. Even though revenue growth was at the lower end of expectations due to re-phasing of projects, it expects growth rates to pick up through the remainder of the year. Overall, the company is progressing well on its strategic priorities as it continues to invest in quality, safety, scientific talent and business development activities.

Sales of Q1 of FY19 were boosted by a one-off raw material cost pass-through billing of about Rs 40 crore. To really analyze this quarter's performance, it is important to take that Rs 40 crores off the revenue line and the material cost line. Excluding this one-off item, underlying revenues have actually grown by 15% yoy.

The primary drivers of sales growth is the steady growth in Discovery Services and the Dedicated Center business. But, some of the phasing of the development and manufacturing businesses has lowered the growth rate for this quarter.

The company had about 3% benefit on account of the currency movement.

EBITDA and PAT margins for the quarter are 32% and 16% respectively which is slightly lower than the adjusted full year average of last year, but well within expectations for this part of the year.

In Q1, it recorded interest income of Rs 20 crore associated with the finance charges of Rs 7 crore and income taxes of Rs 7 crore. Adjusted EBITDA margin excluding the impact of interest income for the quarter is 29% and PAT is 16%.

Employee cost as a percentage of revenue is up 30% compared to 28% in Q1 FY19. This is mainly because of the increase in headcount which reflects the growing demand for its services and the effect of the annual salary increment.

The company has classified certain expenses relating to property as finance and depreciation charges in line with the new accounting standard. This is reflected in a reduction of Rs 4 crore in other expenses and a corresponding increase in depreciation and finance charges. Besides this, there was also a marginal decline in general overheads during the quarter.

Most of its clients are based outside India and they are predominantly invoiced in US Dollars. However, reporting currency is Indian rupees.

During the quarter, it had FOREX gain of Rs 2 crores compared to a gain of Rs 11 crores in Q1 FY19. This reflects the difference between the forward rates versus the prevailing spot rate. The hedge rate was 50 paise above the spot rate during the quarter.

The company has hedged for the full year and therefore does not expect any negative impact of the rupee appreciation.

The effective tax rate has marginally decreased to 17% in Q1 FY20 due to the revenue mix and the impact of some of the new units that are expected to go live later this year.

The company invested approximately $ 30 million towards ongoing capex program in this quarter of which $ 12 million pertains to the API manufacturing facility and another $ 12 million pertains to the Discovery Services. With this capex infusion, its fixed assets currently stand at $ 330 million and is on track to take overall asset base to $ 550 million by the end of FY21.

The construction of a commercial API manufacturing facility in Mangalore is on track and is scheduled to be operational by end of FY2020.

The management expects the second phase of the upgraded S2 facility to also be operational by the end of this year.

With regards to the insurance claim, so far the company has received Rs 81 crore and expects to receive the balance proceeds over the next 12 months.

It expects growth to accelerate in the second half of this fiscal, taking up full year growth and margins to be in line with the directional outlook that it had given in the last investor call.

During the last conference call the company had said that it expects the good momentum to continue into FY20. It had added that overall, the management expects the underlying sales growth, stripped of currency and one-off pass-throughs, to be broadly in line with the underlying sales growth in FY19, perhaps even a notch higher.

Dedicated Center is actually about a third of its business that is 33%. Discovery Services accounted for 29% and Development and Manufacturing accounted for about 38%. That is the broad mix of the business of last year.

Over the last couple of years, the company has seen a small but growing contribution to revenue from Biologics. That has the opportunity to continue to drive growth this year and into next. So it is more near-term driver of manufacturing business.

Mangalore investment is a long-term investment. Plant like that has something like a 30-year asset life. The management asked not to focus on the next four quarters or even eight quarters. It is still in the construction stage and the management expects it to finish by March of next year and then it will take it through a qualification process and start to build the first client base. The management said that it would be tracking the plant over the next three years not over the next three quarters.

The management refused to give guidance numbers but said that it would be comfortable with EBITDA margin in the low-30s which will be an indicative of a well-run quality business. PAT margins in the high teens up to 20% again are indicative, if one looks at global peers, of being a well-run added-value business. The management is comfortable with both of those.

As some of its SEZ infrastructure, the SEZ tax shield unwinds, there will be a little bit of a temporary headwind but the management is still more than happy that it can deliver a business in high teens, 20% or so range at PAT level. But that is through a business cycle. So, that is not a prediction for a particular quarter or a particular year. In general, it is quite happy with the margin structure of the business. It stands up well versus global peers as being upper quartile.

Till now $330 million is capitalized, $50 million is work-in progress and then another $170 million to be spent over the next two years.

The management expects tax rate to come in lower and that is linked to a lot of new capacities going onstream and the additional depreciation associated with that. it should be in that range 17% to 18% for FY 2020.

If we look at last year's sales growth of 28%, it is about the particular impact of the one-off pass-throughs and the currency. That takes it to about 20% growth at constant currency for last year excluding the one-offs. In last call, the management had indicated that it expects revenues growth for FY20 to come in around that number.

If sales grow at 15% in, it means that Q2, Q3 and Q4 should be at much higher rate to take it an average of 20%. Sales growth will be more biased to the second half, not specific quarter.

Salary hikes are done in April to June.