Global Supply Chain Rebalancing Will Support Long Term Demand For Indian CRDMO Capacity

Catalysts

About Sai Life Sciences

Sai Life Sciences is a global contract research, development and manufacturing organization that partners with innovator pharma and biotech companies across discovery, development and commercial supply of complex medicines.

What are the underlying business or industry changes driving this perspective?

• Rebalancing of global supply chains away from single geography dependence, including China Plus One, is accelerating multi-year outsourcing to India. This may support sustained double digit revenue growth and better asset utilization.
• Large pharma is in the early stages of building India-based supply chains and integrated CRDMO relationships. Sai’s growing share of pharma business versus biotech is likely to help stabilize volumes and support earnings visibility.
• Deepening capabilities in high value modalities such as peptides, ADCs, oligonucleotides and broader XDC platforms can shift the mix toward more complex projects, which may lift net margins as these programs commercialize.
• Ongoing capacity expansion from about 700 KL to 1,150 KL by FY 27, together with a late stage pipeline and three new products moving into late stage, may help the company convert current order visibility into higher commercial revenues and operating leverage.
• Investments in process excellence, a regulatory track record with zero critical observations, and consulting led productivity programs are expected to support structural efficiency gains, which may support EBITDA margins in the high twenties and strengthen future earnings potential.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sai Life Sciences's revenue will grow by 16.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 15.9% in 3 years time.
• Analysts expect earnings to reach ₹5.2 billion (and earnings per share of ₹23.09) by about December 2028, up from ₹2.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹5.8 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 79.2x on those 2028 earnings, up from 64.6x today. This future PE is greater than the current PE for the IN Life Sciences industry at 32.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.05%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current strength in demand is partly offsetting a slowdown in biotech funding, but if biotech capital remains weak for several years or large pharma reallocates budgets back in house, the CRO pipeline of early stage programs could soften, which would pressure revenue growth and limit operating leverage on new capacity, ultimately weighing on earnings.
• The company is undertaking significant capacity expansion to 1,150 KL and accelerating CapEx while still refining its long term strategy, so if late stage and commercial volumes do not ramp as expected or inventory corrections hit large products, utilization could fall short, compressing EBITDA margins and dragging on net income through higher depreciation and interest costs.
• Management is investing heavily in emerging modalities like peptides, ADCs, oligonucleotides and broader XDC platforms in markets where technologies, customer approaches and winning formats are still unsettled, so a wrong call on where the science or customer demand ultimately lands could lead to underutilized high tech assets and subscale service lines, diluting consolidated margins and earnings.
• Rising other expenses, including sizeable consulting fees to benchmark against global CDMOs and drive productivity, highlight an ongoing need for external support to execute the growth pivot, and if these transformation programs fail to deliver sustainable efficiency gains, structural costs could remain elevated and erode the targeted 28 to 30 percent EBITDA margin range and future profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹1082.4 for Sai Life Sciences based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1197.0, and the most bearish reporting a price target of just ₹975.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹32.8 billion, earnings will come to ₹5.2 billion, and it would be trading on a PE ratio of 79.2x, assuming you use a discount rate of 14.0%.
  
• Given the current share price of ₹880.15, the analyst price target of ₹1082.4 is 18.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.