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Biocon: Impressive performance

Jan 20, 2005

Introduction to results
Biocon, a leading biopharmaceutical company, has declared its 3QFY05 results with strong topline and bottomline growth. The topline grew by 28%, while net profit witnessed a growth of 45% YoY during the quarter. The operating margins of the company saw a 370 basis point increase and the net margins witnessed a 320 basis point improvement.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 1,390 1,780 28.1% 3,960 5,380 35.9%
Expenditure 960 1,180 22.9% 2,660 3,630 36.5%
Operating profit (EBDITA) 430 600 39.5% 1,300 1,750 34.6%
Operating profit margin (%) 30.9% 33.7%   32.8% 32.5%  
Other income 0 50 - 10 120 1100.0%
Interest 0 1 - 20 20 0.0%
Depreciation 40 60 50.0% 120 160 33.3%
Profit before tax 390 590 51.3% 1,190 1,710 43.7%
Tax 40 80 100.0% 220 150 -31.8%
Profit after tax/(loss) 350 510 45.7% 970 1,560 60.8%
Net profit margin (%) 25.2% 28.7%   24.5% 29.0%  
No. of shares (m) 100.0 100.0   100.0 100.0  
Diluted earnings per share (Rs)* 14.0 20.4   12.9 20.8  
P/E ratio (x)         22.4  
(* annualised)            

Leading bio-pharmaceutical company
Biocon started as an enzymes (organic chemicals used in fermentation process) manufacturer and leveraged its expertise in fermentation to evolve into an integrated bio-pharmaceutical company with expertise across the value chain, with strengths in microbial techniques, manufacturing and marketing. The company has two subsidiaries: Syngene and Clinigene, which are involved in custom research and clinical research respectively. Syngene contributes about 8% to the total consolidated revenues of the company, while its bottomline contribution stands higher at 12% (FY04).

What has driven performance?
Bio-pharma ad custom research drive revenues:  The sales growth in 3QFY05 continues to be robust at 28%. The major growth driver in the topline has been biopharmaceuticals and the custom research business. In biopharmaceuticals, the company launched proprietary human insulin product 'Insugen’ in mid of November. While the exact sales number from the product is unknown, the response for the product in the market has bee encouraging. The product is competitively priced and Biocon is hoping to garner a good size in the Rs 2.5 bn market. On statins front, the company continues to witness strong volume growth while some pressure on pricing front has restricted margin growth. However, the company feels that the prices are likely to stabilize at these levels.

The custom research business also witnessed a strong growth of 100% in revenues. The company entered into long-term research agreement with Novartis and Merck in the December quarter. However, the real show stealer was enzymes business, which despite being commodity in nature witnessed a growth rate of 35% in the quarter. The basic growth in the enzymes business came from US and Europe where the company witnessed strong growth in food, beverages and alcohol industry. With increasing focus on bio-fuels, Biocon believes that it is likely to see robust growth in this segment.

Business Mix
  9mFY04 9mFY05 Change
BioPharmaceutical 3,210 4,260 32.7%
(% of consolidated revenues) 81.1% 79.2%  
Custom Research 270 470 74.1%
(% of consolidated revenues) 6.8% 8.7%  
Enzymes 480 650 35.4%
(% of consolidated revenues) 12.1% 12.1%  
Total 3,960 5,380 35.9%

Margins not sustainable
The company saw a significant 2.8% improvement in operating margins in 3QFY05, while margins in 9mFY05 witnessed a marginal decline. The basic reason for the increase in the margins during the quarter is better product mix and improvement in productivity. It must be noted that the company is operating at more than full capacity, which has helped it maintain margins in the December quarter. However, going forward, we believe that with new capacities coming up and increasing competition in statins business, the margins are likely to come under pressure going forward.

What to expect?
At Rs 466 the stock is trading 22.4x its annualized 9mFY05 earnings and 18.5x its estimated FY06 earnings. The growth in the topline of the company will continue to be robust. Revenues will be driven by statins in the short term. Statins opportunity in the form of Pravastatin (came off patent in Europe recently) and Simvastatin and Pravastatin (both will come off-patent in mid of CY06 in US) will help the company drive its revenues.

With the company investing in creating capacity for the same, we believe Biocon will be the biggest beneficiary of this opportunity. Apart from that, the company's successes in R&D such as human insulin and monoclonal anti bodies and other biological products will help it to grow in long term. The company’s clear strategy of using stains and other generic products as short term cash-flow generator and investment in proprietary technology for long-term augurs well for investors who can remain invested for the long-term.

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