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We maintain Buy rating and target price of Rs555 for Biocon based on 18xDec’15 EPS
of Rs30.8. Despite lower revenue growth, Biocon’s EBIDTA and net profit for Q3FY14
were in line with our expectations. The company reported good growth in domestic
formulations and research service segments. Lower R & D spend led to margin
improvement during the quarter. Biocon has launched world’s first biosimilar
Herceptin under the brand name CANMAb in India. With registration of rh-insulin in
over 50 countries, it is poised for good growth in FY15 when its Malaysian facility for
insulin is expected to go on stream. Key risks to our assumptions are stiff competition
from other global players and change in clinical trials environment in India.
CRAMS business to drive growth: Biocon reported moderate sales growth of 11%YoY
driven by its CRAMS segment consisting of Syngene and Clinigene. The company’s
biopharma business (60% of revenues) grew by 2%YoY to Rs4.18bn from Rs4.09bn.
Domestic formulations (14% of revenues) grew by 16%YoY to Rs992mn from Rs855mn.
Biocon’s CRAMS business (26% of revenues) grew by 32%YoY to Rs1.84bn from
Rs1.40bn. We expect the CRAMS business to report good growth due to its association
with 5 major global clients.
Low R & D spends lead to margin improvement: Biocon’s EBIDTA margin improved
190bps to 24.2% from 22.3%, mainly due to low R & D spend and reduction in material
cost. The company’s material cost declined by 20bps to 48.2% from 48.4% due to strong
growth in CRAMS segment. Personnel cost grew by 140bps to 15.2% from 13.8% due to
annual rise in salaries. Biocon’s other expenses declined by 310bps to 12.4% from 15.5%
due to decline in R & D expenses. Its R & D expenses declined by 53%YoY to Rs230mn
from Rs490mn.
Moderate rise in net profit: Biocon’s net profit for the quarter grew by 15%YoY to
Rs1,050mn from Rs917mn due to improvement in EBIDTA margin, decline in interest
cost and lower tax rate. The company’s interest cost declined by 90%YoY to Rs3mn from
Rs29mn due to debt repayment. Its tax rate declined to 19.1% from 21.4%. Biocon’s all
hedging contracts for BMS expired in Q2FY14 and hence the hedging cost has come
down.
Recommendation and key risks: At the CMP of Rs451, Biocon trades at 22.6x FY14E
EPS of Rs20.0 and 17.2x FY15E EPS of Rs26.2 and 14.0x FY16E EPS of Rs32.2. We maintain
Buy rating on the scrip with a target price of Rs555 based on 18x Dec’15 EPS of Rs30.8
with an upside of 23% from CMP. Key risks to our assumptions are competition from
other global players in emerging markets. Moreover, the recent changes in the clinical
trial environment may lead to transferring some clinical trials to other countries
resulting in higher cost.
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We maintain Buy rating and target price of Rs555 for Biocon based on 18xDec’15 EPS
of Rs30.8. Despite lower revenue growth, Biocon’s EBIDTA and net profit for Q3FY14
were in line with our expectations. The company reported good growth in domestic
formulations and research service segments. Lower R & D spend led to margin
improvement during the quarter. Biocon has launched world’s first biosimilar
Herceptin under the brand name CANMAb in India. With registration of rh-insulin in
over 50 countries, it is poised for good growth in FY15 when its Malaysian facility for
insulin is expected to go on stream. Key risks to our assumptions are stiff competition
from other global players and change in clinical trials environment in India.
CRAMS business to drive growth: Biocon reported moderate sales growth of 11%YoY
driven by its CRAMS segment consisting of Syngene and Clinigene. The company’s
biopharma business (60% of revenues) grew by 2%YoY to Rs4.18bn from Rs4.09bn.
Domestic formulations (14% of revenues) grew by 16%YoY to Rs992mn from Rs855mn.
Biocon’s CRAMS business (26% of revenues) grew by 32%YoY to Rs1.84bn from
Rs1.40bn. We expect the CRAMS business to report good growth due to its association
with 5 major global clients.
Low R & D spends lead to margin improvement: Biocon’s EBIDTA margin improved
190bps to 24.2% from 22.3%, mainly due to low R & D spend and reduction in material
cost. The company’s material cost declined by 20bps to 48.2% from 48.4% due to strong
growth in CRAMS segment. Personnel cost grew by 140bps to 15.2% from 13.8% due to
annual rise in salaries. Biocon’s other expenses declined by 310bps to 12.4% from 15.5%
due to decline in R & D expenses. Its R & D expenses declined by 53%YoY to Rs230mn
from Rs490mn.
Moderate rise in net profit: Biocon’s net profit for the quarter grew by 15%YoY to
Rs1,050mn from Rs917mn due to improvement in EBIDTA margin, decline in interest
cost and lower tax rate. The company’s interest cost declined by 90%YoY to Rs3mn from
Rs29mn due to debt repayment. Its tax rate declined to 19.1% from 21.4%. Biocon’s all
hedging contracts for BMS expired in Q2FY14 and hence the hedging cost has come
down.
Recommendation and key risks: At the CMP of Rs451, Biocon trades at 22.6x FY14E
EPS of Rs20.0 and 17.2x FY15E EPS of Rs26.2 and 14.0x FY16E EPS of Rs32.2. We maintain
Buy rating on the scrip with a target price of Rs555 based on 18x Dec’15 EPS of Rs30.8
with an upside of 23% from CMP. Key risks to our assumptions are competition from
other global players in emerging markets. Moreover, the recent changes in the clinical
trial environment may lead to transferring some clinical trials to other countries
resulting in higher cost.
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