Buy Biocon - Motilal Oswal

Biocon (BIOS IN; Mkt Cap USD1.4b, CMP Rs321, Buy)

Biocon's 1QFY11 performance was above our estimates. Key highlights:

- Net sales grew by 33.6% YoY to Rs6.6b (against our estimate of Rs5.9b) and PAT grew 34% YoY (on a low base) to Rs767m (against our estimate of Rs698m).

- Topline growth was led by 38% YoY growth in Biopharma revenue to Rs3.3b and 37% YoY growth in Axicorp to Rs2.6b. Contract research revenues grew 8.6% to Rs720m.

- EBITDA grew 30% YoY to Rs1.3b (against our estimate of Rs1.1b) mainly due to better-than-expected revenue and a ramp-up in licensing income (contributes directly to EBITDA) and EBITDA margins declined by 60bp YoY to 19.8% (in line with our estimate).

- PAT grew by 34% YoY to Rs767m (on a low base of 1QFY10), and was higher than our estimate of Rs698m due to higher-than-expected revenue and licensing income.

Key growth drivers for FY11 will be: 1) traction in the company's insulin initiative, 2) ramp-up in contract research business, and 3) incremental contribution from immuno-suppressants API supplies. However, higher R&D costs, increased depreciation and higher expenses linked to the scale-up of the domestic formulations business will continue to temper earnings growth. Option values for the future include the separate listing of Syngene and a potential out-licensing of the oral insulin NCE. Despite the better than expected 1QFY11 performance, our EPS estimates are unchanged as the increase in revenue forecast will be offset by higher R&D expenses and lower other income. We estimate EPS of Rs17 for FY11 (up 15.7%) and Rs20.3 for FY12 (up 19.5%) leading to 17% earnings CAGR over FY10-12. The stock is valued at 18.9x FY11E and 15.8x FY12E earnings. Maintain Buy with a target price of Rs345 (17x FY12E EPS).

Source : Equity Bulls

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