Sunday, October 4, 2009


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).

To see full report: BIOCON LIMITED