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Biocon: Bottom line plummets - Views on News from Equitymaster

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Biocon: Bottom line plummets
Jan 23, 2015 | Updated on Jan 28, 2015

Biocon has announced its 3QFY15 results. The company has reported 8.5% YoY growth in sales and a decline of 13.4% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 8.5% YoY during the quarter, largely driven by the contract manufacturing segment.
  • Operating margins decline by 4.3%, leading to the 11% YoY drop in operating profits for the quarter.
  • On the back of poor operating performance, net profits decline by 13.4% YoY during the quarter.

Standalone financial performance snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 7,011 7,609 8.5% 21,301 22,290 4.6%
Expenditure 5,315 6,093 14.6% 16,372 17,400 6.3%
Operating profit (EBDITA) 1,696 1,516 -10.6% 4,929 4,890 -0.8%
EBDITA margin (%) 24.2% 19.9%   23.1% 21.9%  
Other income 185 181 -2.2% 573 594 3.7%
Interest (net) 3 48 1500.0% 10 104 940.0%
Depreciation 513 563 9.7% 1,496 1,624 8.6%
Profit before tax 1,365 1,086 -20.4% 3,996 3,756 -6.0%
Tax 261 112 -57.1% 878 639 -27.2%
Profit after tax/(loss) 1,105 975 -11.8% 3,118 3,117 0.0%
Minority Interest 54 65 20.4% 112 158 41.1%
Net profit after minority int 1,050 909 -13.4% 3,006 2,959 -1.6%
Net profit margin (%) 15.0% 11.9%   14.1% 13.3%  
No. of shares (m)         200.0  
Diluted earnings per share (Rs)         20.7  
Price to earnings ratio (x)*         20.0  
*based on trailing 12 months earnings

What has driven performance in 3QFY15?
  • Topline grew by 8.5% YoY during the quarter. While the Biopharmaceutical segment remained under pressure, contract manufacturing witnessed healthy growth.

    Business Mix 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Biopharmaceuticals 4,182 4,366 4.4% 13,050 13,137 0.7%
    (% of consolidated revenues) 60% 57%   61% 59%  
    Branded Formulations 992 1,047 5.5%  2,988  3,312 10.8%
    (% of consolidated revenues) 14% 14%   14% 15%  
    Contract Manufacturing 1,837 2,196 19.5%  5,263  5,841 11.0%
    (% of consolidated revenues) 26% 29%   25% 26%  
    Total 7,011 7,609 8.5% 21,301 22,290 4.6%

  • The growth in Biopharmaceutical segment continued to get impacted due to lower supply in MENA region and Fidoximicin. The Indian branded biopharmaceutical segment too demonstrated poor performance. This was largely due to rationalization of some products. The company is focusing on some high margin products and has stopped selling few low margin drugs in India. This will help in better portfolio mix going forward.

  • The contract manufacturing witnessed good growth. The company's Board has approved the proposal for the listing of Syngene and is in the process of appointment of merchant bankers. Biocon is likely to sell its 10-15% stake from Syngene subsidiary. The company management has indicated to list Syngene on Indian stock exchanges by the end of 1HFY16.

  • On the operating front, the margins were impacted due to sharp surge in the R&D expenses. The net R&D expenses (excluding deferred and capitalized portion), were up by 133% YoY. Further, the costs pertaining to Malaysian facility also increased during the quarter.

  • The bottomline too was impacted due to poor operating performance. However, lower taxes aided the profits till some extent. The profits were down by 13.4% YoY for the quarter.
What to expect?
At the current price of Rs 402, the stock is trading at a price to earnings multiple of 15.5 times our revised estimated FY17 earnings.

The current performance reported by the company was quite poor. We have revised our estimates downward. While the Indian branded segment and contract research segment remain the key driver for the company, the biopharmaceutical segment is a concern. While the new Malaysian facility will fuel the growth in long term, however it will take some time for the company to ramp up sales. Over and above, risk in our view is failure in its R&D programs where the company is incurring huge costs.

In addition to this, the current valuations do not offer margin of safety and thus we reiterate our Sell view on the stock.

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