Brief
Mr. Jasti, the promoter of Suven Pharmaceuticals, is selling the majority of his stake in the company to a strategic partner and moving out from the operating role. This has triggered an open offer at Rs 495. For now, we hold on to get more clarity on the growth plans of the new promoter.

Details
Suven Pharmaceuticals has been in our portfolio since Dec 2019 and has done fairly well with initial investment turning 4x in these three years. It continues to be high-quality business as reflected in its 42-45% operating margin with an extraordinary return on capital employed. We have held on to this investment as the business continues to grow in double-digit and trades at a reasonable valuation.

Its owner-operator Mr. Jasti has continued to run both businesses post the demerger of the research entity Suven Life Sciences. At the same time, the scale and complexity has gone up necessitating the need of professional leadership for Suven Pharma. There have been efforts for some time now however nothing materialized yet in terms of the succession of Mr. Jasti.

Earlier today (December 26), the company announced on Stock Exchanges that Mr Jasti has agreed to sell 50% stake in Suven Pharma (he holds 60%) to Advent International (Private Equity) at Rs 495 per share. The buyer has also announced an open offer at the same price for an additional 26% equity.

Mr. Jasti will step down from his operational role once control is passed on, although he will continue to be involved in an advisory capacity and as a minority shareholder with a 10% stake.

There has been speculation that Mr. Jasti has done this to raise money to fund ongoing research in Suven Life Sciences, however, that entity has already raised Rs 400 Cr via rights issues. Hence, this transaction indeed seems to be addressing succession planning while bringing a strategic partner to ensure the company is run professionally.

Typically, in such cases when the owner-operator moves on, we tend to revisit the entire thesis with a bias towards exiting, as we did in the case of Tasty Bite Eatables. However, in this case, we are avoiding rushing to any conclusion for the following reasons:
- Suven’s new promoter Advent already owns a large pharma business in India (API & CDMO platform) under Cohance Lifesciences which was created by merging three businesses - RA Chem Pharma, ZCL Chemicals and Avra Laboratories.
Advent plans to merge Cohance with Suven to create a giant. Cohance’s annual turnover is about Rs 1,300 Cr, which is equal to Suven’s scale albeit at a lower margin of 28%. There are no regulatory issues in any of its plants. The combined entity will have 11 manufacturing locations making it the third largest such business in India offering meaningful synergies in terms of clientele, processes, and cost saving. There is currently no update with respect to the merger ratio or the timelines etc, however, Advent has categorically stated to do this in favor of Suven’s shareholders ensuring it is EPS accretive for us.
- Further, there is an open offer at Rs 495 per share from the new promoters, ensuring our downside is protected. For now, we continue to hold and see how it unfolds.

Relevant Links
Press Release: https://www.bseindia.com/xml-data/corpfiling/AttachLive/70515937-748a-47a3-bdcc-44056c9659e0.pdf

Open Offer: https://www.bseindia.com/xml-data/corpfiling/AttachLive/9DE5CD62-563C-4ECA-B328-C9F4923DA779-090225.pdf

Advent’s Interview: https://twitter.com/cnbctv18news/status/1607286612093980677?s=46&t=A8ehVHjUwtMLkwJCf0O-Hg

Mr. Jasti’s Interview: https://twitter.com/CNBCTV18News/status/1607223237003608064