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Biocon: Exceptional gain saves the day
Apr 26, 2013

Biocon has announced its 4QFY13 results. The company has reported 7% YoY growth in sales and 154% growth in net profit. Here is our analysis of the results.

Performance summary
  • Topline grows by 7% YoY during the quarter. Poor performance is largely due to lower growth in Biopharmaceutical segment. However the domestic formulations and contract manufacturing segments witness robust growth of above 30%.
  • Operating margins decline by 4.1% largely due increases in staff costs. Margins are also impacted due to higher licensing income in 4QFY12. On the other hand R&D expenses are down by 18%.
  • Bottomline increases by 156% YoY during 4QFY13 due to exceptional gain of Rs 2 bn during the quarter.

Financial performance: A snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 5,893 6,302 6.9% 20,490 24,277 18.5%
Expenditure 4,665 5,251 12.6% 15,692 19,423 23.8%
Operating profit (EBDITA) 1,228 1,051 -14.4% 4,798 4,854 1.2%
EBDITA margin (%) 20.8% 16.7%   23.4% 20.0%  
Other income 331 188   993 1,103 11.1%
Interest (net) 30   9 -70.0% 122 81 -33.6%
Depreciation 431 459 6.5% 1,744 1,793 2.8%
Profit before tax 1,098 771 -29.8% 3,925 4,083 4.0%
Exceptional Item  - 2,019   1,316 2,019 53.4%
Tax 120 281 134.2% 541  975 80.2%
Profit after tax/(loss) 978 2,509 156.5% 3,384 5,127 51.5%
Minority Interest  - 23   - 39  
Net profit after minority int 978 2,486 154.2% 3,384 5,088 50.4%
Net profit margin (%) 16.6% 39.4%   16.5% 21.0%  
No. of shares (m)         200.0  
Diluted earnings per share (Rs)         25.4  
Price to earnings ratio (x)*         11.4  
*based on trailing 12 months earnings

What has driven performance in 4QFY13?
  • Topline grew by 7% YoY during the quarter. This subdued performance was partially attributed to the shut down in the insulin facility during February 2013 as expansion activity was undertaken. As per the management, the company is looking to re-start its manufacturing by 2013.

    Consolidated financial performance
      4QFY12 4QFY13 Change FY12 FY13 Change
    Biopharmaceuticals 4,063 3,797 -6.5% 13,795 15,231 10.4%
    (% of consolidated revenues) 69% 60%   67% 63%  
    Branded Formulations 650 846 30.2% 2,594 3,474 33.9%
    (% of consolidated revenues) 11% 13%   13% 14%  
    Contract Manufacturing 1,180 1,659 40.6% 4,101 5,572 35.9%
    (% of consolidated revenues) 20% 26%   20% 23%  
    Total 5,893 6,302 6.9% 20,490 24,277 18.5%

  • Total Biopharmaceuticals segment sales declined by ~1% YoY for 4QFY13. The muted performance was largely attributed to the lower sales in the international biopharmaceutical segment. Even after excluding licensing income of Rs 463 m and Rs 20 m for 4QFY12 and 4QFY13 respectively, this segment grew by approx 5% YoY for the said period. However, the domestic branded formulations segment witnessed healthy growth of 30% YoY for the quarter.

  • Biocon's partner Optimer for Fidaxomicin continues to see ramp up in the Fidaxomicin sales. As per the Biocon management, it will be the sole API supplier to Optimer for atleast next 4-5 years. Biocon has already started supplying Atorvatstatin API to its partners for European markets. For the US markets, company has contract for API supply to 4-5 customers, however all are awaiting approval. Going forward in the next two years, the company intends to file 20 ANDAs in US market.

  • The domestic branded formulations witnessed healthy growth of 30% YoY for the quarter. As per the company management, the EBITDA margins of this segment are below the company's overall EBITDA margins. The current sales force for the domestic market stands at 1,500 MRs. Going forward, the company expects its sales force productivity to improve, which in turn will have a positive impact on EBITDA. The company will also launch Herceptin generics (trastuzumab - indicated for breast cancer), in the Indian markets during FY14 and will be the second company to do so. The innovator, Roche is currently selling two brands of Herceptin in Indian markets. The current size of Herceptin is Rs 2.5 bn. However, Biocon intends to launch the product at a lower price and expects good market potential from this launch.

  • The contract research segment too showed healthy growth of 41% YoY during the quarter. For FY13, this segment grew by 36% YoY. However, some part of the company's revenues from contract research was impacted by forex loss due to forex positions taken by the company for the BMS contract. From 2HFY14, onwards these losses will go away, as these forex contracts will expire. Biocon had entered into a deal with BMS for 7 years, currently this contract is in the 4th year of its operations. Biocon intends to list Syngene in FY15. As per the Biocon management, Biocon's research division is the second largest in Asia.

  • Operating margins declined by 4.1% to 16.7% during the quarter largely due to increase in material costs and other expenses. The company had paid approximately Rs 100 m as special bonus paid to employees and incurred a forex loss of Rs 80 m. Adjusting this one time expense and forex, EBITDA margins were still low by 2.5% (250 bps). Margins were also impacted due to higher licensing income in 4QFY12.

  • Bottomline increased by 154% YoY during 4QFY13, due to exceptional income. This includes income of US$ 20 m recognized from Pfizer. Further, the company had also incurred Rs 150 m write off towards an investment. The company has lost SEZ benefit for many of its manufacturing plants.

    Biocon's guidance on various segments

  • Top line guidance - For FY14, the company targets to grow by similar rate as for FY13 at 18%.

  • On its Malaysian facility - Biocon expects its Insulin facility to become operational by FY15. This facility is expected to ramp up the company's revenues.

  • Contract with Mylan - Biocon had recently entered into a contract with Mylan for various biosimilar insulin analogs. The company has received upfront payment of US$ 20 m for the same. As per the deal, both the companies will be sharing the R&D expenses pertaining to the trials. The global market size of the molecules partnered is US$ 13 bn.

    Financial Highlights

    1. R&D expenses - Currently, the company has US$ 70 m (including US$ 20 m from Mylan) as deferred assets. The company will utilize these amounts for the R&D expenses. The R&D expenses pertaining to the trials in recombinant human insulin and Glargine will be used from deferred assets.

    2. Capex - The company will incur capex of Rs 1.5 bn for FY14.

    3. Debt - The current gross debt in the company's books is Rs 1.6 bn, this expected to increase in FY14.

    4. Tax rate - Going forward, Biocon has guided for a tax rate of 22% for FY14.

What to expect?
At the current price of Rs 290, the stock is trading at a price to earnings multiple of 13.4 times our estimated FY15 earnings. The branded formulations business will be the key growth driver for the company. With the set up of the Malaysian facility, Biocon will ramp up sales of insulin and other segments. Launch of new products in the Indian Branded formulations space will also help in the company's growth in the long run.

However, the main risks to our view include slower ramp up of revenues in the biopharma business and R&D expenses for the upcoming period. In light of the current valuations, we maintain a Buy rating on the stock.

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