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Biocon: Marred by forex losses - Views on News from Equitymaster
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Biocon: Marred by forex losses
Jan 21, 2009

Performance summary
  • Revenues for 3QFY09 grow by a robust 84% YoY, led by the strong performance of the biopharmaceuticals (including the acquired company AxiCorp) and contract research businesses.
  • EBDITA margins contract by 1.4% during the quarter on the back of a considerable rise in raw material and staff costs (both as percentage of sales).
  • Bottomline during the quarter tumbles by 90% YoY. However, if we exclude the extraordinary items during both 3QFY08 and 3QFY09, then the bottomline registers a 39% YoY growth.

Financial performance: A snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 2,374 4,362 83.7% 7,872 11,424 45.1%
Expenditure 1,803 3,373 87.1% 5,723 8,937 56.2%
Operating profit (EBIDTA) 571 989 73.2% 2,149 2,487 15.7%
Operating profit margin (%) 24.1% 22.7% 27.3% 21.8%
Other income 227 98 -56.8% 249 282 13.3%
Depreciation 243 253 4.1% 697 796 14.2%
Interest 20 36 80.0% 74 115 55.4%
Profit before tax 535 798 49.2% 1,627 1,858 14.2%
Tax 17 58 241.2% 69 134 94.2%
Extraordinary item 2,385 (458) 2,385 (1,058)
Minority interest 15 - 43 16 -62.8%
Profit after tax/ (loss) 2,918 282 -90.3% 3,986 682 -82.9%
Net profit margin (%) 122.9% 6.5% 50.6% 6.0%
No. of shares (m) 100 200
Diluted earnings per share (Rs)* 12.0
P/E ratio (x)** 9.5
* Excludes extraordinary item ** on a trailing 12 months basis

What has driven performance in 9mFY09?
  • Bioconís topline grew by a robust 45% YoY during 9mFY09. This was largely led by the strong performances of the biopharmaceuticals (up 70% YoY) and contract research (up 21% YoY) businesses. However, it must be noted that the biopharmaceutical revenues include the sales of AxiCorp in which Biocon has bought a 71% stake and therefore on a like-to like basis overall sales recorded a much tapered down growth of 8% YoY. As far as the biopharma business is concerned, excluding the AxiCorp revenues, sales grew by 13% YoY. This growth was led by insulin and the retail healthcare business (up 42% YoY). The licensing income in 9mFY09 was considerably lower than that in 9mFY08, due to the overall global economic slowdown as a result of which innovators are vary of making huge payments upfront and prefer to go in for collaboration agreements instead. Revenues from the contract research business grew by a robust 40% YoY during the quarter to enable Biocon post a strong 21% YoY growth in this business during 9mFY09.

    Business mix
    3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Biopharmaceutical 1,919 3,729 94.3% 5,776 9,802 69.7%
    (% of consolidated revenues) 80.8% 85.5% 73.4% 85.8%
    Licensing fees 23 25 8.7% 345 55 -84.1%
    (% of consolidated revenues) 1.0% 0.6% 4.4% 0.5%
    Enzymes - - 457 -
    (% of consolidated revenues) 0.0% 0.0% 5.8% 0.0%
    Contract research 432 608 40.7% 1,294 1,567 21.1%
    (% of consolidated revenues) 18.2% 13.9% 16.4% 13.7%
    Total 2,374 4,362 83.7% 7,872 11,424 45.1%

  • Bioconís operating margins witnessed a considerable 5.5% contraction during 9mFY09. This was largely due to the rise in raw material costs (as percentage of sales), which increased from 48.6% in 9mFY08 to 55% in 9mFY09. However, a large part of this rise has been attributed to the inclusion of AxiCorp results in Bioconís numbers. Thus, excluding the same, raw material costs (as percentage of sales) during 9mFY09 declined by 3.1% due to an improvement in the product mix and lower solvent prices. Thus, operating margins during the nine-month period (excluding AxiCorp) improved by 1.4%.

  • Bioconís net profits tumbled by 83% YoY during 9mFY09 due to higher tax expenses and forex losses. While the mark to market forex loss stood at Rs 1 bn during 9mFY09, the extraordinary gain of Rs 2 bn during 9mFY08 was due to the divestment of the enzymes business to Novozymes. Excluding this extraordinary expense during both the periods, the bottomline grew by 9% YoY.

What to expect?
At the current price of Rs 114, the stock is trading at a multiple of 8.2 times our estimated FY11 earnings. Biocon has been reducing its dependence on statins and is increasingly focusing on insulin, immunosuppressants, branded formulations and monoclonal antibodies, which will be critical in driving growth in the future. While these new segments will take some time to significantly contribute to revenues, products like Insugen and Biomab EGFR are performing strongly, which is a positive sign. The company has also been active in inking deals with innovator companies for developing biotech products, which will augur well from a long-term perspective.

Contract research will be a significant revenue driver in the future and the contribution of this segment has been rising to overall revenues. The company is also gearing up for biosimilar launches in Europe beginning with insulin and is focusing on branding of products and getting closer to the markets and hence the rationale for acquiring 71% stake in AxiCorp, a Germany based pharma company. However, AxiCorp at present is a low margin business and since the biosimilar opportunity in the developed markets will start taking shape two years from now, till such time AxiCorpís low margins will be a drag on Bioconís overall profitability.

While the growth in topline has been above our estimates, operating margins and net profit growth has been in line with our estimates. Overall, we maintain our positive view on the stock from a long-term perspective.

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