Biocon - Sustainable growth - Centrum

Biocon revenues for Q1FY13 were lower than our expectations. The company reported 18%YoY growth in revenues, 310bps fall in EBIDTA margin and 5%YoY growth in net profit. The sales growth was across all verticals. Notably among them were: 42%YoY growth in branded formulations-India and 39%YoY growth in contract research. Biocon's Itolizumab has completed Phase III clinical trials and is likely to be launched in India. The company's recombinant human insulin has successfully completed phase III trials in Europe. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E EPS).

- Good sales growth: Biocon reported 18%YoY growth in revenues from Rs5.03bn to Rs5.92bn. The biopharmaceutical business (63% of revenues) grew by 8%YoY from Rs3.46bn to Rs3.72bn. Its branded formulation business (15% of revenues) grew by 42%YoY from Rs645mn to Rs913mn. The contract research business (22% of revenues) grew by 39%YoY from Rs932mn to Rs1,291mn.

- Margin under pressure: Biocon's margin for 2QFY13 declined by 310bps from 22.8% to 19.7% of net sales due to the overall increase in costs. Its material cost increased by 220bps from 47.0% to 49.2% of net sales due to the rise in imported raw material cost. Personnel cost and other expenses went up by 50bps each. The margin was also affected due to Rs365mn licensing development income in Q2FY12.

- PE investment in Syngene: GE Capital Corporation would invest Rs1.25bn in Syngene for 7.69% stake. Syngene has reported sales of Rs4.0bn in FY11. Hence, the deal has been done at 4.1x revenues valuing Syngene at Rs16.25bn. Biocon's 22% of business is thus valued at 31% of its market cap.

- Strong growth in biosimilars: Optimer Pharma, US has launched Fidaxomicin in Europe and Canada in June'12. Biocon achieved strong growth for other biosimilars namely: insulin, immuno suppresants, Tacrolimus and Orlistat. We expect biosimilars to drive future growth.

- Branded formulations: Biocon has reported 42%YoY growth in branded formulations led by good growth in oncology, diabetology and comprehensive care. The major growth driver brands are: Insugen, Basalog, Abraxane and BoiMAb EGFR. We expect this business to report strong growth due to new product introductions.

- Valuations: We expect Biocon to benefit from the strong growth in domestic branded formulations, contract research and insulin businesses. At the CMP of Rs266, the stock trades at 15.5x FY13E EPS of Rs17.2 and 12.4x FY14E EPS of Rs21.5. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E base EPS of Rs21.5) with an upside of 29.3% over CMP.

Source : Equity Bulls

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