>BIOCON LIMITED (MERRILL LYNCH)

Poised for re-rating; PO raised

■ Earnings upgrade, likely re-rating
We raise PO to Rs341 (earlier Rs165) based on (1) upgrade in EPS forecasts by 25-28% over FY10-11, following improved sales visibility in bio-pharma and customs research, as well as milestone receipts, and (2) expected re-rating to 18x FY11E EPS (earlier 11x) on growth ahead of peers as well as past averages, and potential triggers of further outsourcing deals.

■ Stronger traction in biopharma and custom research
We expect insulin and immunosuppressant i.e. biopharma, which represents ~34% of sales, to grow at 25-32% over next 2 years (compared to earlier 22-25%) driven by new launches in RoW and EU markets. We similarly expect Custom research (~15%) to register 34% CAGR compared to earlier 27% CAGR, on faster scale-up of BMS contract, from 260 to 400 scientists. Outlook for residual domestic formulations and statins business is stable in line with our expectations.

■ Upside risk to our forecasts
We see upside risk from (1) technology income from recently concluded deal with Mylan on biogenerics research, which may be as high as US$20mn vs our peak assumption of US$10mn for FY11 (12% of EPS), and (2) outlicensing for oral insulin (IN-105, Phase III) which may have upfront receipts upto $30mn.

■ Valuations attractive, upside triggers ahead
Stock trades at 13.7x 1-yr forward P/E, which is 10% disc to historical average. We expect stock to re-rate given (1) improved growth visibility, (2) expectation of upsides from Mylan deal & out-licensing deal (IN-105).

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