Biocon: Buy; Target Price: Rs570; Centrum

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Rating: Buy; Target Price: Rs570; CMP: Rs476; Upside: 20%



Affected by capacity constraints



We maintain Buy rating on Biocon with a revised target price of Rs570
(earlier Rs660) based on 18xSeptember’16E EPS of Rs31.7. Biocon’s
results were below our expectations and were impacted by capacity
constraints and geo-political situation in the Middle East and North
Africa. The company reported 17%YoY growth in domestic formulations
and 2%YoY in research service segments. Higher personnel cost led to
100bps margin decline during the quarter. With registration of
rh-insulin in over 55 countries, it is poised for good growth when its
Malaysian facility for insulin is expected to go on steam by the end
of FY15. Key risks to our assumptions are slowdown in the biopharma
segment and delay in the implementation of Malaysian insulin facility.

$ Formulation business to drive growth: Biocon reported sales growth
of 2%YoY driven by domestic formulations. The company’s biopharma
business (59% of revenues) declined by 1%YoY to Rs4.42bn from
Rs4.47bn. Domestic formulations (15% of revenues) grew by 17%YoY to
Rs1.16bn from Rs989mn higher than the industry growth of 11.6%.
Biocon’s CRAMS business (26% of revenues) grew by 2%YoY to Rs1.92bn
from Rs1.88bn. We expect CRAMS business to report good growth due to
its association with major global clients BMS, Abbott and Baxter and
extension of BMS contract for five years. We expect Domestic
Formulations business to drive future growth.

$ Malaysian facility to improve margins: Biocon’s EBIDTA margin
declined by 100bps to 22.0%% from 23.0% due to the increase in
personnel expenses. The company’s material cost declined by 80bps to
46.9% from 45.7% due to the change in product mix. Personnel cost grew
by 270bps to 16.7% from 14.0% due to the addition of 590 employees
during the year. Biocon’s other expenses declined by 290bps to 14.4%
from 17.3%. Its R & D expenses increased by 25%YoY to Rs559mn from
Rs446mn. We expect margin improvement going further due to higher
growth in formulation business and commencement of insulin facility in
Malaysia.

$ Net profit maintained: Biocon’s net profit for the quarter was
maintained at Rs1.02bn. The company’s other income grew by 24%YoY to
Rs231mn from Rs187mn.Biocon’s interest cost went up by 1,567% to
Rs50mn from Rs3mn due to temporary borrowings. Its tax rate declined
to 16.9% from 23.9% of PBT. We expect improvement in net profit due to
margin improvement and debt-free status of the domestic entity.

$ Recommendation and key risks: We maintain Buy rating on the scrip
with a revised target price of Rs570 based on 18x September’16E EPS of
31.7 with an upside of 20% from CMP.  We have lowered our FY15 and
FY16 EPS estimates by 13% and 14% respectively. Key risks to our
assumptions are slowdown in the biopharmaceutical segment and delay in
the implementation of Malaysian insulin facility.



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