Tuesday, October 28, 2014

BIOCON: Malaysian facility for insulin poised for good growth (CENTRUM)

Affected by capacity constraints

We maintain Buy rating on Biocon with a revised target price of Rs570 (earlier Rs660) based on 18xSeptember’16E EPS of Rs31.7. Biocon’s results were below our expectations and were impacted by capacity constraints and geo-political situation in the Middle East and North Africa. The company reported 17%YoY growth in domestic formulations and 2%YoY in research service segments. Higher personnel cost led to 100bps margin decline during the quarter. With registration of rh-insulin in over 55 countries, it is poised for good growth when its Malaysian facility for insulin is expected to go on steam by the end of FY15. Key risks to our assumptions are slowdown in the biopharma segment and delay in the implementation of Malaysian insulin facility.

 ■ Formulation business to drive growth: Biocon reported sales growth of 2%YoY driven by domestic formulations. The company’s biopharma business (59% of revenues) declined by 1%YoY to Rs4.42bn from Rs4.47bn. Domestic formulations (15% of revenues) grew by 17%YoY to Rs1.16bn from Rs989mn higher than the industry growth of 11.6%. Biocon’s CRAMS business (26% of revenues) grew by 2%YoY to Rs1.92bn from Rs1.88bn. We expect 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. We expect Domestic Formulations business to drive future growth.

 Malaysian facility to improve margins: Biocon’s EBIDTA margin declined by 100bps to 22.0%% from 23.0% due to the increase in personnel expenses. The company’s material cost declined by 80bps to 46.9% from 45.7% due to the change in product mix. Personnel cost grew by 270bps to 16.7% from 14.0% due to the addition of 590 employees during the year. Biocon’s other expenses declined by 290bps to 14.4% from 17.3%. Its R & D expenses increased by 25%YoY to Rs559mn from Rs446mn. We expect margin improvement going further due to higher growth in formulation business and commencement of insulin facility in Malaysia.

Net profit maintained: Biocon’s net profit for the quarter was maintained at Rs1.02bn. The company’s other income grew by 24%YoY to Rs231mn from Rs187mn.Biocon’s interest cost went up by 1,567% to Rs50mn from Rs3mn due to temporary borrowings. Its tax rate declined to 16.9% from 23.9% 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 Rs570 based on 18x September’16E EPS of 31.7 with an upside of 20% from CMP. We have lowered our FY15 and FY16 EPS estimates by 13% and 14% respectively. Key risks to our assumptions are slowdown in the biopharmaceutical segment and delay in the implementation of Malaysian insulin facility.