Know your stock | Is there a glimmer of hope for SeQuent Scientific?

The stock has plummeted almost 76 percent since rising to a record in July 2021. But now, it seems to be on the comeback trail. Animal health company SeQuent Scientific rebounded 24 percent over the past week, signalling a potential turnaround.

But what exactly does the company do?

Where it all began 

SeQuent Scientific is an integrated pharmaceutical company that was founded in 2002, specialising in animal health products, including Active Pharmaceutical Ingredients (APIs) and formulations. The company has a global footprint, with manufacturing facilities located across Europe, India, and other emerging markets such as Turkey and in Latin America. It operates three API facilities in India (Tarapur, Mahada and Vizag) and six formulation plants and five research and development centres spread across Spain, Brazil, Germany, and Turkey.

SeQuent Scientific’s product line caters to global market requirements for livestock, poultry, and companion animals. The company offers APIs and finished drug formulations under the Alivira brand name in global markets, along with laboratory and technical support services.

In February of this year, the company acquired Nourrie Saúde e Nutrição Animal Ltda (Nourrie), a move that marked SeQuent Scientific’s entry into the fast-growing pet segment in Brazil. Brazil is the fourth largest pet market in the world, estimated to be worth $1.8 billion and growing at nearly 16 percent per year. The acquisition of Nourrie nearly doubled the product portfolio available to SeQuent Scientific  for commercialisation in Brazil, with additions in both the nutraceutical and therapeutic product categories. The acquisition also added Nourrie’s strong pipeline of 20 products under development to the company’s kitty, 12 of which are scheduled for launch in the next fiscal year.

The company is also backed by global investment firm Carlyle Group as its promoter, which holds a majority stake of 52.79 percent through its affiliated entity CA Harbor Investments. To be sure, foreign institutional holding in the company has declined since the second quarter of FY21, following a slump in its stock price. As of the end of the third quarter of FY22, foreign institutional holding in the company has reduced to 6.25 percent, down from 14.12 percent at the end of the second quarter of FY21. Conversely, public shareholding in the company increased to 37.76 percent by the end of December 2022 from 29.73 percent at the end of September 2021.

Clearly, the institutional selling has come on the back of a weak financial performance. During the third quarter, SeQuent Scientific reported weak financial results, with a net loss of Rs 9.8 crore compared to a net profit of Rs 18.56 crore in the same period the previous year. While revenue saw modest growth of nearly 5 percent, the company’s profitability and margins have been under strain since FY21, resulting in three consecutive quarterly net losses in the current financial year. But why is its business going downhill?

Why the deteriorating performance 

During the third quarter earnings call, SeQuent Scientific’s management highlighted several challenges in the macro environment as major hurdles for the company’s earnings in recent quarters. These challenges include high raw material prices, surging utility costs, and issues with the supply chain. In addition, stricter implementation of regulations in the use of antibiotics by the European Union and the outbreak of lumpy skin disease in cattle in India have hurt the company’s bottom line in recent quarters.

The European business has also struggled due to significant macro headwinds and industry-specific challenges such as energy costs. Moreover, global currencies have witnessed erratic movements in the past year, and high levels of inflation in many of the company’s key markets, including Europe, have weakened overall market demand.

The company’s inability to post a net profit despite modest growth in revenue is largely attributed to losses on account of volatile currency movements. In the first nine months of FY23, SeQuent Scientific has recorded an exchange loss of Rs 8.4 crore compared to a gain of Rs 4 crore in the corresponding period last year.

The road ahead 

The company remains hopeful of an improvement in its earnings on the back of a recovery in demand. It is focusing on growing the business through deeper engagement with customers in regulated markets as well as with the top animal health players in the industry.

Efforts in that direction have also started yielding results as revenue contribution from regulated markets has risen to over 70 percent in the third quarter, which is an improvement over recent quarters. The company is also investing in upgrading its facilities and strengthening its capabilities in the API segment.

Another thrust coming to the company’s earnings is through the acceleration of new product pipelines and scaling up of research and development facilities. The company has a total of 27 US Veterinary Master File filings, 12 Certification of Suitability approvals and a portfolio of 35 commercial APIs.

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Along with revamping its product portfolio, SeQuent is also renegotiating some of its contracts and improving it to better terms, which the management feels will position the company well for the future.

On the back of the initiatives taken by the company, the management hopes to clock  high single-digit or early double digit growth in the India business in the coming quarters. In terms of growth in the API segment, Sharat Narasapur, Joint Managing Director of SeQuent Scientific, said in the third quarter earnings call that he was hoping to see early to mid-teen growth in the next three years.

The management also highlighted that in FY24, its focus will be on profitability along with a margin improvement of around 150 basis points on year. One basis point is equal to one-hundredth of a percentage point. From FY25 onwards, the company expects to come closer to posting double-digit growth in its topline.

Underlying risks 

In the third quarter earnings call, several investors raised concern on demand in the European market. Acknowledging the concerns, the management reassured investors that that the company was making efforts to attract more customers, which are also yielding results.

Management explained that this expansion in customer base was happening in two ways. The company has been focusing on increasing its market share by adding new products in its portfolio, which is attracting new customers in regulated markets.

Additionally, the company is also expanding its presence in some of the other less regulated markets where it is finding customers who can provide it with stable revenues over a period of time.

To sum up, Sequent Scientific is working on geographical expansion as well as product expansion to increase its market share and drive demand.??