Stalwart Advisors

Suven goes ex-demerger, sell residual business

Suven Life Sciences traded ex-demerger today - the CRAMS business which generates 100% of the revenues and Rs 200 Cr post-tax profit has been demerged into Suven Pharmaceuticals which will be listed in a few months time.

The current listed entity now only has the New Chemical Entity (NCE) business which involves drug discovery & development. The NCE business today traded at about Rs 200 Cr market capitalisation which is way below Rs 300 Cr cash it will get as part of demerger arrangement and practically no value being assigned to its intellectual property - numerous molecules in the pipeline at various stages of development it created over last 15 years. The reason why market isn't ascribing any serious value to this business is 1). It is a cash guzzler with annual investment of Rs 100-150 Cr into research 2). It has had no successful molecule yet which means it has zero revenues and would eventually need external investments through equity or debt in the scenario that it runs out of the cash over next 2-3 years while no molecule gets into revenue mode.

Generally the odds of success in such endeavours are minuscule though payoffs are extremely large when met with success. We would prefer not to stay invested in such a speculative venture as that does not go with our mandate for running this Model Portfolio. We allocated 4% to Suven at Rs 3,525 Cr Market Cap, so at Rs 200 Cr our effective allocation to residual business of NCE is merely 0.2% making it anyways meaningless in the overall scheme of things.

For a while this stock could be under selling pressure and may remain on lower circuit (with only sellers). We recommend exiting whenever you get an opportunity to do so. We would not have coverage on NCE business henceforth.

Suven Pharmaceuticals (CRAMS) will be listed in a few months time. Accordingly, for now we have moved it to hold (as it is not available for buying/adding). Based on valuations it lists at, we might upgrade it to Buy.

Cost apportionment for taxation purpose: https://www.bseindia.com/xml-data/corpfiling/AttachLive/d9c9039c-0f9f-459a-bb94-39e12418dac4.pdf


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