Biocon - Good growth across business verticals - Centrum

Biocon's results for Q3FY13 were better than our expectations. The company reported 24%YoY growth in revenues, 90bps fall in EBIDTA margin and 8%YoY growth in net profit. The sales growth was across all verticals. Notably among them were, 22%YoY growth in biopharmaceuticals and 27%YoY growth in contract research. Biocon's Itolizumab has received DCGI permission and is likely to be launched in India in FY14. The company's recombinant human insulin has successfully completed phase III trials in Europe. The company has entered into an agreement with Bristol Myers Squibb (BMS) for its oral insulin IN-105. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E EPS).

Good sales growth: Biocon reported 24%YoY growth in revenues from Rs5.20bn to Rs6.43bn. The biopharmaceutical business (64% of revenues) grew by 22%YoY from Rs3.36bn to Rs4.09bn. Its branded formulation business (14% of revenues) grew by 19%YoY from Rs720mn to Rs860mn. The contract research business (22% of revenues) grew by 27%YoY from Rs1.1bn to Rs1.4bn.

Margins decline due to rise in material cost: Biocon's margin for Q3FY13 declined by 90bps from 24.3% to 23.4% of total revenues due to the rise in material cost. Its material cost increased by 200bps from 40.1% to 42.1% of net sales due to the change in product mix. Personnel cost and other expenses declined by 50bps each. The margin was also affected due to Rs310mn licensing development income in Q3FY12.

Rh-insulin gains MS: The company's rh-insulin gained MS in RoW during the quarter. It has been registered in 40 countries and is under registration in additional 30 countries. Biocon has successfully completed second part of Phase III clinical trials for rh-insulin in EU. The rh-insulin is likely to drive future growth.

Branded formulations: Biocon has reported 19%YoY growth in branded formulations segment against the industry growth of ~13%. The growth was led by cardiology, immunology and comprehensive care. The company has currently 1,650 MRs and plans to add more in the near future.

Launch of Itolizumab in India: Biocon has received permission for Itolizumab in India under the brand name Alzumab. The product is used for the treatment of psoriasis and is expected to be launched in FY14. The product has a potential to reach Rs1.0bn over four years and is likely to drive the company's growth.

Insulin project in Malaysia in FY15: Biocon is investing ~$200mn (Rs10.8bn) in setting up a state-of-the-art facility to manufacture rh-insulin. This facility is expected to go on stream in FY15 and is expected to be future growth driver.

Valuations: We expect Biocon to benefit from the good growth in the domestic branded formulations, contract research and insulin businesses. At the CMP of Rs263, the stock trades at 15.3x FY13E EPS of Rs17.2 and 12.2x FY14E EPS of Rs21.5. We have a Buy rating for the scrip with a target price of Rs344 (based on 16x FY14E EPS of Rs21.5) with an upside of 31% over CMP.

Source : Equity Bulls

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