Sequent scientific

Date: 13th Sep 2021

Industry:

On a broader level, the animal healthcare sector is categorised into three segments –
pharmaceuticals, veterinary services, and medical devices. The industry caters to the needs of both
farm animals including cattle, pigs, poultry, sheep, and companion animals such as cats, dogs, and
horses.

The global animal healthcare market is estimated at US$ 51 billion in 2020 and is forecasted to
grow at a CAGR of 5% between 2021 and 2027 led by increasing protein demand and prevalence of
animal specific diseases. North America, Europe and Latin America constitute a significant portion of
the global animal healthcare market. In India, the livestock population contributes 4.5% of India’s
GDP, making it an important factor of the rural economy. Substantial rise in demand for protein along
with increase in prevalence of food-borne and zoonotic diseases globally are expected to drive the
growth of this industry, promoting companies to undertake consistent efforts with an aim of controlling
pathogen contamination risks by producing quality pharmaceutical products including vaccines.

Production animal market segment was valued at US$32 billion in 2020 and is estimated to reach
US$39 billion by 2027. CARG 2.86%.

Production animals dominated the global market in 2020 with a revenue share of around 62%,
compared to companion animals which has a market share of 38%.

Companion animal market segment was valued at US$19 billion in 2020 and is estimated to reach
US$25 billion by 2027. CARG 3.99%. Growing household income has contributed to rising inclination
towards pet ownership. Moreover, factors like increased urbanisation, nuclear families, families with
fewer or no children are creating a need for social support. With rising companion animal ownership,
owners are becoming aware of pet nutrition and health which promotes them to routinely seek
veterinary services.

Trends in Animal Healthcare

Future of animal healthcare industry is likely to be impacted by the following factors:

1. Increased emphasis on animal nutrition: Companies in the animal healthcare industry are
divided into two segments – one that produces pet food to keep the companion animals healthy while
the other makes therapeutic products along with a complete range of animal feed products for the
farm animals. Growing pet ownership coupled with treating pets as a family member has contributed
to the rising demand for quality healthcare of the companion animals. To cater to the ever-increasing
human population, the animal husbandry segment is witnessing the highest ever demand for its
products which in turn is driving the growth of the production animal healthcare segment.

2. Growing Digitisation: The online sale of animal healthcare products is expected to grow at a
CAGR of 4.8% till 2027. Rising internet penetration, customer convenience and inclination towards
the discounted medicines prices will be among the growth drivers for the digital segment.

3. Increasing pet adoption: Despite the pet adoption rate being stable in developed countries, it has
been exploding in the developing countries driven by factors such as rising disposable income among
middle-income households coupled with changing attitudes towards pets. Consumers are influenced
by varying trends around them in areas of health and wellness, and are keen to ensure that their pets
receive products which contain healthy and wholesome ingredients that provide proper nutrients to
their loved ones.
Business:
Over the last few years, we have emerged as India’s largest animal health company with presence in
100+ countries. Our eight manufacturing facilities based in India, Spain, Germany, Brazil and Turkey
have approvals from top global regulatory bodies, including USFDA, EUGMP, WHO, TGA, among
others. We offer a comprehensive portfolio across formulations, animal health Active Pharmaceutical
Ingredients (API), and provide analytical services to the pharmaceutical and life sciences industry.

Only player to have USFDA approved plant in India and China.

In September 2020, The Carlyle Group, a leading global private equity player, acquired a majority
stake in SeQuent. In top 20 animal health players worldwide. Aspiring to be in the top 10.

SeQuent essentially is driving the transformation of a niche industry in India. The leadership team
built strategic capabilities, which include formulations-led inorganic acquisitions to build frontend
presence in key animal health markets of Europe, Brazil, and Turkey; and established the only
USFDA approved greenfield veterinary API facility in India.

line with the Sequent 2.0 blueprint of entering key animal health markets of the USA, select EU
and South-East Asian markets, making injectables as the core domain strength in terms of R&D
as well as manufacturing, and foray into the companion animal or pet business in the select
markets of India, Turkey, and Brazil. Further, strategic partnerships with global animal health
companies will elevate SeQuent’s relationship to the next level.

1,900+ employees across geographies

We commercialised three new APIs and filed four US Veterinary Master Files (USVMFs) during
the year, bringing our total USFDA filings to 23, in addition to our 11 CEP (Certificate of
Suitability) approvals in Europe. We also made our maiden formulation filing in the key animal
health markets of the United States, Canada, and Australia. Our first value-added injectable
formulation developed at India R&D and manufactured in Germany was one of the major commercial
successes in Europe.

We also commercialised Halofusol® and Citramox LA in Europe. Their approval timelines of less
than 12 months from the filing date demonstrate the Company’s strong development capabilities for
regulated markets. In addition to the above launches, we entered into a long-term distribution
arrangement with Zoetis for their ruminants portfolio in India, opening up a new avenue of growth.
Our pipeline of 35+ products under development keeps us confident of maintaining our
momentum going ahead.

In our API business, we inked a long-term multi-product arrangement with a prominent animal
health company, marking our foray into the contract development and manufacturing (CDMO)
business. This arrangement includes co-investment in our Vizag facility with commercial benefits
accruing from 2023. Our R&D team is also working on a robust pipeline of 8+ molecules, with a focus
on supply chain security and strategic interplay with our formulations business.

We significantly reduced our net debt even along with consolidating the minority interest of our
partners which was largely funded by liquidation of our Strides stake. We anticipate that this pace will
continue and we will be debt-free within the next two years, barring any inorganic opportunities.
We anticipate that this pace will continue and we will be debt-free within the next two years, barring
any inorganic opportunities. We continue to emphasise on judicial use of capital and we are happy to
report that our ROCE increased from 7.8% in FY18 to ~20% in FY21. Over the years, we have
strengthened the financials which is evident from the fact that we received 7 rating upgrades over a
period of six years on account of our sustained business performance.

The Company also rolled out a new ESOP scheme in March 2021 to align the interest of
management and employees to the long-term business goals.

It is a matter of pride that we were recently recognised for the second consecutive year by IHS Markit
Animal Pharma News as the Best Company in India/Middle East/Africa for 2020, a testimony of
our consistent outperformance in the animal health industry.

India market: Over the years, SeQuent expanded presence in the ruminants & poulty segment. The
business was impacted at the start of FY21 due to the first wave but started getting traction from
Q2FY21. In particular, our formulations portfolio, accelerated growth in FY21 & grew by 98.4% on a
YoY basis from `391 million to `776 million in FY21. This increase in revenues allowed us to gain
market share (In India).

Our formulations R&D centres in Mumbai and Barcelona cater to the requirements of US, EU, and
other regulated markets, with satellite development centres located in Istanbul (Turkey) and
Campinas (Brazil) supporting the development for local markets. Our API R&D centre at Vizag
focusses primarily on developing new products, improving existing products and expanding product
applications. We continue to develop our product portfolio on the strength of our technology and R&D
expertise. We are working on a pipeline of over 35+ products across multiple species, dosage forms
and therapeutic segments.

Finantials FY21:

1. 17% revenue growth in the last 4 years.

2. 35% EBITDA growth
3. 16% growth in EBITDA margin
4. 43% growth in CFO
5. 16% growth in Grass block + CWIP
6. 20% ROCE
7. 0.22 D/E
8. 65% revenue from regulated and 35% from non regulated.
Formulations:
Our portfolio includes products across various therapy classes such as antibiotics, anthelmintics,
pain management and nutrition.
API:
1. We have emerged as a leading API supplier to global companies.
2. Our API capacities have a strong track record of regulatory compliance with over 70
successful audits as of date.
Competitive advantages:
1. Only player to have USFDA approved plant in India and China.
2. Operates in a niche industry.
3. Global player with scale.
4. Presence in regulatory markets, US and Europe.
5. Strong and dedicated R&D centers across the globe.
6. Internal API supply for formulations portfolio with strategic advantage, value added products.
7. Deepening relationship with global top 10 players: In FY21, over a third of our sales came
from the global top 10 animal health companies, and two third of our sales were to regulated
markets
8. Supply Chain Security: Focus on indigenous development of key KSMs. API intermediates
are developed in India.

Future growth:
1. SeQuent is in the top 20 animal health players worldwide. Aspiring to be in the top 10.
2. Entering key animal health markets of the USA, select EU and South-East Asian markets
3. Making injectables as the core domain strength in terms of R&D as well as manufacturing.
4. Foray into the companion animal or pet business in the select markets of India, Turkey, and
Brazil.
5. Enter into strategic partnerships with global animal health companies.
6. Total 23 USFDA filings and 11 CEP (Certificate of Suitability) approvals in Europe.
7. Long-term distribution arrangement with Zoetis (in India).
8. Pipeline of 35+ products under development. We are working on a pipeline of over 35+
products across multiple species, dosage forms and therapeutic segments.
9. Expansion into CDMO and CMP segment in Animal Pharma.
10. Will be debt-free within the next two years, barring any inorganic opportunities.
11. Expand footprints in United States, UK, Germany along with select Southeast Asian markets
12. We plan to invest in the range of INR 2 billion in expanding our market presence across
geographies over the next two years.
13. We will focus on complex generics development and expand our portfolio by offering
value-added / specialty formulations.
14. Capex:
a. Our expansion in Vizag is a two-phase project, with the first phase now completed
while the second phase is expected to conclude in the next year making us
future-ready.
b. In formulations, we targeted a 4x capacity enhancement at our German facility
which had to be deferred due to execution challenges caused by COVID-19
 c. We are simultaneously working on enhancing the Beta-lactam and oral solids
manufacturing capacities at our Turkish facility which will be completed in 2022.

Risks:
1. Regulatory risks like USFDA.
2. Strategy to enter the US formulation market going wrong. Like wrong acquisition.
3. Currency fluctuations: FY21 continued to be a year of significant volatility, a result of
currency fluctuations across geographies. While we are naturally hedged in India, and gradual
depreciation of the rupee only helps us, we are guided by the Board-approved hedging policy
of keeping at least 30% of our net exposure covered at any given moment. All our global
operations manage risk structurally by ensuring that all debts in respective countries are
either in local currency or are naturally hedged with their cashflows, limiting the impact of
uncertainty on the P&L. In Brazil and Turkey, we have limited exposure to USD denominated
vendor liabilities. While we have established hedging lines for Brazil, we continue to explore
possibilities of hedging our limited liabilities in Turkey.
4. Issued ESOP of 6.93% of the fully diluted share capital, 18.5 million stock options.
5. While Turkey performed ahead of the markets, the depreciation in the Turkish Lira took away
all of that growth.
6. Raw material pressure: we also saw input cost price pressures for both API and Formulation,
as also for some specific operating costs like furnace oil as well as logistics costs.
Credit rating 15th June 2021:
1. The company has demonstrated a strong EBITDA to operating cash flow conversion, a healthy
uptrend in return on capital employed given working capital management, higher asset turnover and
better EBITDA margins, and an ability to integrate and grow the acquired companies, all resulting in
lower financial leverage.
2. The business profile continues to benefit from the company’s presence in both active pharmaceutical
ingredient (API) and formulations businesses, healthy exposure to regulated and less regulated
markets, a healthy base of 32 commercial API molecules and strong pipeline of 23 US Veterinary
Master File and 11 Certification of Suitability filings, advanced pipeline of six molecules and
early pipeline of 10 molecules.
3. In the formulations business, the company has a portfolio of more than 1,000 finished dosage
formulation spread across 12 dosage forms with over 40 products under development, providing
adequate growth visibility to the formulations business.
4. The formulations business is likely to benefit as the revenue from high-margin injectable dosage
form increase, low-margin therapies reduce and increasing share from companion animals than
farm animals.
5. Healthy growth in the formulations sales exceeding underlying industry growth trends, given the
strong field force and relationships the company could form with the end consumers
6. SSL has a strong business risk profile because of large and diversified revenue streams across
geographies and products. SSL has four manufacturing facilities in India and four overseas, which
enables it to maintain low production facility level concentration as well. The company’s customer and
product concentration has been fairly distributed such that no major revenue is derived from a single
customer.
7. Strong R&D Capabilities
8. CG has also shown the willingness to invest additional funds for any future acquisition.
9. M&A Planned in Near Term: During FY15-FY21, the company completed eight acquisitions at a total
outlay of about INR4 billion
10. Exposure to Regulatory Actions: SSL remains exposed to regulatory risks, as it derives nearly 50% of
its revenue from the regulated markets.

Q3FY21:
1. We have been guiding to a margin improvement of 150 to 200 bps over a medium term.
2. A typical pharmaceutical business requires front-loading of investments, and secondly, given we are
in animal health, which is a branded generic industry, it is also a higher fixed cost business because
of field force requirements. Clearly, both these aspects suppress margins in the early phase of business,
but also facilitate margin expansion over time as you scale up.
3. Zoetis, who is the industry leader, commands an EBITDA margin of mid 30s, and we are currently
at halfway level of that.
4. So we have been generally guiding to around a 20% growth in our API business in the mediumterm.
And in pharma, you always need to plan your capacities ahead of the requirement. So we stay on track
for delivering our guidance of around 20%-odd growth on the API side of business.
5. Certainly, the injectable portfolio that we are developing will be higher margin.
6. This industry grows between 3% and 5% across the world. We are expecting midteens revenue
growth with API growing faster than our formulations business in the mediumterm.
7. FY'22 onwards, maybe instead of 150 to 200 bps, we should be looking at about 100 bps margin
improvement.
8. From a business angle, animal health does not see the price fluctuations that you see in human
pharma
9. We are still between 15 to 18 months away from our US commercialization unless there is an
acquisition.
10. That was taking us to maybe early 20s kind of EBITDA margins by FY'24.
11. Europe is the most competitive amongst all animal health markets around the world.
12. we are only focused on secured payment business and not doing or undertaking any business that
entails open credit.
13. We are a dull and boring company as I keep telling, and a purely execution-focused company.
14. 20s to mid-20s kind of margin range in the medium term of three to five years.
 15. More than margins, what we are happier about is our cash flows and both the sustenance and the
predictability of our cash flows. Start looking at our cash flows of business because that's what makes
animal health unique compared to other businesses.
16. 2.5x asset turns in API. Long term guidance of 3x.
17. And front-end is really the strength in animal health, not the R&D/manufacturing. And if you see, our
entire business model and business strategies are around building front-end, very different from typical
human pharma businesses.

Q4FY21:
1. Globally animal health industry got distinctly separated from human pharma since about 2013
2. expand our footprints into the key missing markets of the US, select EU and select Southeast
Asian markets;
3. make injectables as our core domain of strength, both in terms of R&D as well as manufacturing;
4. make a foray into the pet business in select markets of India, Turkey, and Brazil;
5. get into complex or value-added generics, leveraging our strong presence in the API business as
well
6. Towards this expanded vision, we shall be both scaling up our manufacturing footprints with investments
in the region of $30 million over the next 24 months spread across all geographies. You would
appreciate that some of these investments will be significant, keeping a long-term view in mind, and will
have a limited impact on business over the next 2 years. We expect to reap the benefits of these
initiatives after a couple of years. Therefore, while we continue to guide towards mid-teen revenue
growth in the medium term,
7. we have been guiding to mid-teens revenue growth and 150 to 200 bps margin improvement. What we
are doing today is that we are taking a break from that in terms of margin expansion
8. The CAPEX my guess would be about 25% towards API and the remainder would be towards
formulation.
9.

Q1FY22:
1. ESOP cost of Rs.156 million in Q1FY22 . Almost 50% of the impact coming in the first 12
months. ESOPs vest over five years, almost 50% of the cost get booked in the first year or
the first 12 months. So, that is the implication of the ESOP cost that we have booked during
the current quarter. It started from March 2021, so one month cost was booked in the
previous quarter, the current quarter reflects the peak cost which is three months of cost, and
it will continue till February of next year and thereafter it will start coming down unless new
ESOPs are also granted to new employees. So, effectively it becomes 100% of year one
vesting plus 50% of year two vesting plus 33% of year three vesting plus 25%, and so on. So,
that way if you add up, the first-year impact is the maximum
2. 15% growth guidance on API side.
3. We stay very confident of delivering if not better but at least similar margins as last year.
4. Certainly, a lot of this growth or improvement will be back ended because you would
understand or appreciate that the incremental contribution of API business in margins is much
superior, given that there are no sales and marketing costs related to a B2B business.
5. EBITDA margins from operations will not be very different from where we ended last year.
6. 2x revenue growth potential in five years from FY2020 and 20% EBITDA margin potential
within five years.
7. Long-term outlook for the API growth will be 20% CAGR.
8. Businesses like us are highly fixed cost intensive business, so moment if the sales is not in
line with what you envisage, then the margins get impacted, and same is on the other side,
the moment sales recover, the margins expand fairly rapidly.
9. we will be moving from pure generics to speciality generic kind of products
10.
Check List

What is the name of the stock and the market capitalisation?

Name Market capitalization (in crores)

Sequent Scientific 5791

Which category of the stock am I looking at?

Slow Growers
Stalwarts
Fast Growers
Cyclicals
Turn-Arounds
Asset Plays
What is the quality of Accounting?
What is the Debt/Equity of the company? (Prefer<0.7): 0.31
Is the company misallocating capital? (Non-core business): No. All capex is going
into the same line of business.
Has the company shared the wealth with the shareholders historically? (Check
Dividend Payout & Share Buyback): 20% in 2021. Growing company, doing a lot of
capex.
What is the CFO/EBITDA & CFO/PAT for the last 1, 3 & 5 years? (Higher the better &
also compare with peers)
CFO/EBITDA
Company name 2019 2020 2021

Sequent Scientific 93% 68% 53%

NGL fine chem 27% 85% 34%

Zoetis 86% 92%

Elanco 61%
Elanco had negative OP and PAT in FY20
US based companies follows calendar year as financial year

CFO/PAT
Company name 2019 2020 2021

Sequent Scientific 238% 165% 120%

NGL fine chem 44% 185% 48%

Zoetis 120% 130%

Elanco 329%

Does the promoter have private entities in the same line of business? No
How high are the Related Party Transactions compared to sales? (Extremely high tax
disputes in Inox's leisures case): very low
 Is there any contingent liability that threatens survival?
What is the auditor's opinion & are there any red flags in the auditor's opinion (E.g:
Shankara Building Products):
What is the Gross Working Capital when compared to the Industry? (GWC=
Receivable Days + Inventory Days): 177 days in FY21, NGL 130 days, zoetis 329
days,
Company name GWC
2021

Sequent Scientific 177

NGL fine chem 130

Zoetis 329

Elanco 289

How many times has the CFO changed in the last 5 years? Zero times
What percentage is goodwill as a percentage of total assets? (Is the goodwill
acquired due to acquisitions in the non-core areas): 238 cr intangible assents in
fy21. Total fixed assets are 537 cr.
How high are the miscellaneous expenses as compared to the other expenses? (E.g:
Wockhardt as compared to the rest of the industry):
The biggest red flag is if the Auditor resigns without any explanation
How complex is the corporate structure? (E.g: UPL): very simple
Are there any unaudited subsidiaries? (E.g: Motherson Sumi): no
High Pledge (more than 30%) + High Debt is a lethal combination: no pledge
What are the qualitative filters to look for?
What is the Industry growth rate? (Are we looking at an expanding or a contracting
pond): The global animal healthcare market is estimated at US$ 51 billion in
2020 and is forecasted to grow at a CAGR of 5% between 2021 and 2027.
Is the company able to grow its sales in the last 5 years? (Sales growth > 10%): 18%
CAGR in last 5 years
Who are the competitors? Only player in India. NGL fine chem is mainly in API
and unregulated markets. Zoetis, Merck, Boehringer, Elanco, Bayer are some in
global markets.
Are the margins sustainable or volatile? (We prefer sustainable & improving operating
margins. Look at the last 5-10 years of operating margins): Operating margins are
increasing and sustainable
Has the management walked the talk?: yes.
Are we looking at consolidated profit pools or fragmented industry?: consolidated,
only few players commands majority market share
How good are the disclosures? (Do they conduct Con Calls and give detailed investor
Presentations & Annual Reports): Very good.
Is the Industry prone to booms & busts? No. Animal pharma is a stable industry
like FMCG.
Cross cycle ROCE over 15%+: ROCE is improving from the last 5 years and it's
at 17% in FY21. Expect it to grow 25% by FY25.
What type of Industry are we looking at?
1) Structural (E.g: FMCG, CDMO, Platforms)
 2) Shallow Cyclicals (E.g: Off The Highway Tyres, Chemicals)
3) Cyclicals (E.g: Graphite Electrodes)
What is the Competitive Advantage of the business?
Switching Cost + Critical Application
Brand
Distribution
Economies of Scale
Low-cost Producer
Regulatory Barriers to Entry
Network Effects
Intellectual Property/Technical Know-How
Exit Barriers
What Type of Business are we looking at?
Business to Business (B2B)
Business to Consumer (B2C)
Business to Government (B2G)
Business to Institution (B2I)
What are the Key Financial Metrics?
ROCE/ROE of last 5 years (ROCE > 15% compared to peers):

Company FY17 FY18 FY19 FY20 FY21

Sequence 1 41 9 13 17

NGL 34 22 28 25 52

Zoetis 24 25 21 21 20

As per my thesis this should reach and remain 25% by FY25

Gross Margins when compared to peers: margins at 45-50% in last 5 years. NGL
fine chem has 57-62%. Zoetis margins are between 66-69%. Low as compared
to pears but has potential to improve in future because they are entering into
US market and focusing on high margin products.

Operating margins when compared to peers:

Company FY17 FY18 FY19 FY20 FY21

Sequence 10 12 14 16 13

NGL 26 19 21 15 30

Zoetis 37 37 40 40 42

Low as compared to pears but has potential to improve in future because they
are entering into US market and focusing on high margin products.

Sales Growth of last 3-5 years: 5 year CAGR

Sequent: 18%
NGL: 22%
Zoetis: 7%
 Debt/Equity < 0.7: 0.31
Interest Coverage Ratio ( more than 5 times ): 6.6 in FY21
Fixed Asset Turnover of last 5 years: 1, 1.8, 2.1, 2, 2.5
Trend of Receivable Days & Inventory Days: receivable days decreased from 135
to 93.
Check the Capex from CFI (If a manufacturing business): last 5 years CFI is 79, 47,
25, 41, 53
Do I completely understand the sources of earnings growth of the company? (Circle them)
GEOGRAPHICAL EXPANSION
NEW PRODUCT INTRODUCTION
GROWTH IN THE END USER INDUSTRY
CLIENT MINING
TAKING AWAY MARKET SHARE
INDUSTRY GROWTH
NEW BRAND INTRODUCTION
CAPEX
ACQUISITION
EXPANDING DISTRIBUTION
Which type of Investing am I doing?
Variant Perception (Typically Buy at < 1 time PEG Ratio)
Growth at Reasonable Prices (Typically Buy at < 1.5 times, max 2 times PEG Ratio
on the basis of forward estimates of earnings)
Quality Investing (Typically hold for decades irrespective of the price)
Deep Cyclical Investing (Typically buy at the bottom of the cycle)
What is the Key Metric to track?
Geography focus
Regulated
Semi-regulated
cGMP classified plants? yes
How many ANDAs/USVMF filling per year: Total 23 USVMF filings and 11 CEP
(Certificate of Suitability) approvals in Europe. 4 in last year. 33 products in
pipeline in formulation. A healthy base of 32 commercial API molecules and
strong pipeline of 23 US Veterinary Master File and 11 Certification of Suitability
filings, advanced pipeline of six molecules and early pipeline of 10 molecules.
Industry
Generics
Complex generics
Biosimilaries
NCE
API
CRAMS (CDMO and CMO)
Any adverse regulations in the past? no
Cost leader or not in API’s? Into API’s
CDMO pipeline and customers: Just started. One long term contract signed in last
year.
Gestation: cost frontend and returns backend
 What are the Thesis Pointers for Buying the stock?
Corporate actions
Margin expansion
Deleveraging
Product mix change
Consistent compounders
Capex
Operating leverage
Demerger
Management change
Industry cycle
Cost reduction
What are the Thesis Pointers for Selling the stock?
The growth has stopped
My thesis is wrong
Found a better opportunity
I need cash
Account quality worsens
Stock Specific & Sector Specific Volatility (When the stock corrects by 35%-40% in
isolation
Where am I standing today?
Bucket 1: High ROCE + High earnings growth (reinvestment moat + size of
opportunity)
Bucket 2: High ROCE + No/Low earnings growth (legacy moat + limited size of
opportunity)
Bucket 3: Good ROCE + High earnings growth (reinvestment moat + large size of
opportunity)
Bucket 4: Good ROCE + No/Low earnings growth (legacy moat + limited size of
opportunity)
Bucket 5: Gruesome ROCE or High ROCE + Low/High earnings growth (Cyclicals =
sometimes reinvestment, sometimes legacy)

Competitors:
NGL Fine Chem:
PE: 27
price/sales: 6.3
EVEBITDA: 18 (Mean: 12, lowest: 5, highest: 26)
Sustainable Operating Profit margin: 25% (as per management guidance)

Zoetis:
PE: 61
Price/sales: 13
EVEBITDA: 30 (Mean: 24, lowest: 17, highest: 34)
Operating Profit margin: 35%

Elanco:
Price/sales: 3.4
EVEBITDA: 23 (Mean: 24, lowest: 13, highest: 44)
Operating Profit margin: 5.3%

Valuation (4 year target, end of FY25)

Current market cap: 5791
Sales FY21: 1362
OPM FY21: 16%

TTM Sales: 1384

TTM OPM: 13%
TTM EVEBITDA: 30 (Mean: 26, lowest: 10, highest: 93)
TTM price/sales: 4.2
Assumptions:
1. Sales to grow at 15% from FY22 to FY25 (as per management guidance)
2. Operating profit to grow to 25% by FY25 (as per management guidance)
3. Debt remains at 224 at the end of FY25
4. EVEBITDA to remain at between, 24 to 30, at the end of FY25

Sales at end of FY25 = Sales FY21 + 15% CAGR increase for 4 years = 2382

Bear Base Bull

(discount to current valuation) (Current valuation) (Management vision)

Sales: 1900 Sales: 2382 Sales: 2382

Operating margin: 20% Operating margin: 25% Operating margin: 25%
EBITDA: 380 EBITDA: 595 EBITDA: 595
Market cap: 6236 (assuming Market cap: 14000 (assuming Market cap: 17626 (assuming
EVEBITDA of 17) EVEBITDA of 24) EVEBITDA of 30)

*Upside: 8% (2% CAGR) *Upside: 141% (25% CAGR) *Upside: 200% (32% CAGR)
*Assuming management topline growth will playout

Need more margin of safety in bear case. Ideal Entry level is when Market Cap is less than
5300. Bought tracking position at 5500 market cap.