Rating: Buy; Target Price: Rs620; CMP: Rs480; Upside: 29.1%
Muted revenue growth
We maintain Buy rating on Biocon with a revised target price of Rs620
(earlier Rs640) based on 18xJune’16E EPS of Rs34.5. Biocon’s results
were below our expectations and were impacted by the geo-political
situation in the Middle East and North Africa. The company reported
10%YoY growth in domestic formulations and 11%YoY in research service
segments. Lower material cost led to margin improvement during the
quarter. Clinical trials of Biocon’s oral insulin IN-105 is
progressing well. With registration of rh-insulin in over 55
countries, it is poised for good growth in FY15 when its Malaysian
facility for insulin is expected to go on steam by the end of FY15.
$ CRAMS business to drive growth: Biocon reported sales growth of
4%YoY driven by domestic formulation and CRAMS segments. The company’s
biopharma business (61% of revenues) declined by 1%YoY to Rs4.36bn
from Rs4.40bn. Domestic formulations (15% of revenues) grew by 10%YoY
to Rs1.10bn from Rs1.01bn in line with the industry growth of 9.8%.
Biocon’s CRAMS business (24% of revenues) grew by 11%YoY to Rs1.72bn
from Rs1.55bn. We expect the 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.
$ Lower material cost improves margins: Biocon’s EBIDTA margin
improved 230bps to 24.0% from 21.7% due to the decline in material
cost. The company’s material cost declined by 320bps to 40.1% from
43.3% due to strong growth of CRAMS segments, where the material cost
is lower. Personnel cost grew by 80bps to 17.3% from 16.5%. Biocon’s
other expenses grew marginally by 10bps to 18.6% from 18.5%. Its R & D
expenses declined by 19%YoY to Rs376mn from Rs465mn. We expect margin
improvement going further due to higher growth in formulation and
CRAMS, which command higher margins.
$ Net profit indicates moderate growth: Biocon’s net profit for the
quarter grew by 10%YoY to Rs1,029mn from Rs935mn due to improvement in
EBIDTA margin and lower tax rate. The company’s other income declined
by 26%YoY to Rs166mn from Rs225mn. Its tax rate declined to 22.4% from
23.6% 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 Rs620 based on 18x June’16E EPS of
Rs34.5 with an upside of 29% from CMP. We have lowered our FY15 and
FY16 EPS estimates by 3% each. Key risks to our assumptions are
slowdown in the biopharmaceutical segment and delay in the
implementation of Malaysian insulin facility. Moreover, recent changes
in the clinical trial environment may lead to transferring some
clinical trials to other countries resulting in higher cost.
Thanks & Regards
��
Muted revenue growth
We maintain Buy rating on Biocon with a revised target price of Rs620
(earlier Rs640) based on 18xJune’16E EPS of Rs34.5. Biocon’s results
were below our expectations and were impacted by the geo-political
situation in the Middle East and North Africa. The company reported
10%YoY growth in domestic formulations and 11%YoY in research service
segments. Lower material cost led to margin improvement during the
quarter. Clinical trials of Biocon’s oral insulin IN-105 is
progressing well. With registration of rh-insulin in over 55
countries, it is poised for good growth in FY15 when its Malaysian
facility for insulin is expected to go on steam by the end of FY15.
$ CRAMS business to drive growth: Biocon reported sales growth of
4%YoY driven by domestic formulation and CRAMS segments. The company’s
biopharma business (61% of revenues) declined by 1%YoY to Rs4.36bn
from Rs4.40bn. Domestic formulations (15% of revenues) grew by 10%YoY
to Rs1.10bn from Rs1.01bn in line with the industry growth of 9.8%.
Biocon’s CRAMS business (24% of revenues) grew by 11%YoY to Rs1.72bn
from Rs1.55bn. We expect the 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.
$ Lower material cost improves margins: Biocon’s EBIDTA margin
improved 230bps to 24.0% from 21.7% due to the decline in material
cost. The company’s material cost declined by 320bps to 40.1% from
43.3% due to strong growth of CRAMS segments, where the material cost
is lower. Personnel cost grew by 80bps to 17.3% from 16.5%. Biocon’s
other expenses grew marginally by 10bps to 18.6% from 18.5%. Its R & D
expenses declined by 19%YoY to Rs376mn from Rs465mn. We expect margin
improvement going further due to higher growth in formulation and
CRAMS, which command higher margins.
$ Net profit indicates moderate growth: Biocon’s net profit for the
quarter grew by 10%YoY to Rs1,029mn from Rs935mn due to improvement in
EBIDTA margin and lower tax rate. The company’s other income declined
by 26%YoY to Rs166mn from Rs225mn. Its tax rate declined to 22.4% from
23.6% 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 Rs620 based on 18x June’16E EPS of
Rs34.5 with an upside of 29% from CMP. We have lowered our FY15 and
FY16 EPS estimates by 3% each. Key risks to our assumptions are
slowdown in the biopharmaceutical segment and delay in the
implementation of Malaysian insulin facility. Moreover, recent changes
in the clinical trial environment may lead to transferring some
clinical trials to other countries resulting in higher cost.
Thanks & Regards
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