Anand Rathi: Biocon Lacking growth catalysts; initiate with Sell

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Biocon
Lacking growth catalysts; initiate with Sell
We initiate coverage on Biocon with Sell and target price of `298.
We are negative on the stock due to muted growth outlook
(11.4% revenue CAGR over FY10-13e), stretched valuations (21.5x
FY12e earnings) and lack of short-to-medium term triggers.
 Lack of near-term catalysts. We do not see any major growth
drivers in the near-to-medium term. Launch of bio-generics in
regulated markets is expected only after FY12e and revenue
contribution to Biocon will increase gradually thereafter, thus
thereby presenting no immediate major upside.
 More than 50% revenue from low-margin businesses. Biocon
generates +50% of total revenue from low-margin businesses viz.,
statins and trading business of its subsidiary, AxiCorp. Such high
contribution would act as a hurdle for margin expansion.
 Muted growth outlook. We expect Biocon to witness only
11.4% revenue CAGR and 13.8% net profit CAGR over FY10-
13e. We do not expect major improvement in EBITDA margin,
which is likely to remain at 20-21%. Low growth would lead to
RoE remaining flat at ~17% over FY11-13e vs. 17.9% in FY10.
 Valuation and risks. At CMP, the stock trades at 22.6x FY11e
and 19.9x FY12e earnings. Current valuations seem stretched,
given muted growth outlook and past 3-year average forward PE
of 17x. Upside risks: Outlicensing of oral insulin and supply
contracts for insulins/statins with MNCs.