Biocon Ltd - Pfizer dissociation priced in - Systematix

Biocon's Q4FY12 performance was better than expected with revenue and net profit outpacing our estimates by 13% and 5% to Rs. 6.1bn and Rs. 978mn (v/s street expectation of Rs. 860mn), respectively. However, margin was lower at 25.3% (v/s our est. of 26.5%), mainly due to increased R&D initiatives of the company resulting in trebling growth in research spending during the quarter, where we find no concern. Better sales performance was led by enhanced growth momentum in Biopharma and continued >30% growth in research services. Going ahead, we believe Biocon will deliver steady growth led by ramp up in its Fidoxamicin API supply (to Optimer) as well as its insulin & branded formulation sales. On the contrary, operating margin will remain under check, led by increased research spending on pipeline projects. However, we estimate Biocon's core earnings will grow at a compounded annual growth of 17% over FY12-14E to Rs. 19.5 in FY13 and Rs. 22.9 in FY14E. Also, the company holds multiple licensing opportunities from its research pipeline, any development of which would surprise our estimates positively. We re-iterate our 'BUY' rating on Biocon with a pre-fixed target price of Rs. 284/share.

Better than expected Q4FY12 and FY12 performance

- Biocon reported 30% growth in consolidated revenues to Rs. 6.1bn, which was 13% higher than our expectations. The growth in sales was led by strong 28% rise in Biopharma sales and 33% jump in contract research services.

- Operating margin stood at 25.3% (lower than our est. 26.5%), mainly due to trebling growth in R&D spends in its expanding research pipeline. Operating profit stood at Rs. 1546mn, which was up by 24%.

- Led by higher than expected sales growth, net profit was at Rs. 978mn, which was higher than our estimated profit of Rs. 930mn and street expectation of Rs. 860mn during the quarter.

- Similarly, Biocon's FY12 result was a bit better than our expectation with sales growth of 16% to Rs. 20.86bn (3% higher than est. Rs. 20.21bn) and net profits at Rs. 3.38bn (7% higher than our est. of Rs. 3.18bn).

Negatives priced in; Re-iterate Buy with a Target Price Rs. 284

At CMP of Rs. 239, Biocon is trading at attractive multiple of 12.2x FY13E EPS and 10.4x its FY14E, which is about 25-30% discount to its historic average. The discounted valuation was primarily due to sentimental negatives of Pfizer dissociation from its insulin commercialization pact. On the contrary, the company earned one-off cash gain of ~$160m from Pfizer, which will take care of future R&D spending and could prove to be a long-term positive for the stock.

We believe the valuation gap is just a temporary phenomena, considering the fact of enhanced growth momentum (up by 28% in Q4FY12) in its core biopharma operation led by overall growth in Fidoxamicin supply, Immunosuppresants, increasing registrations of insulin in various emerging markets and robust growth in branded formulations. Also, we expect research services to maintain >30% annual growth in the near future. Additionally, outlicensing opportunities from its expanding R&D pipeline provides enough visibility for future growth. Hence, we re-iterate our 'BUY' rating on Biocon with a pre-fixed target price of Rs. 284/share.

Source : Equity Bulls

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