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Biocon: Strong start to the year - Views on News from Equitymaster

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Biocon: Strong start to the year
Jul 26, 2013

Biocon has announced its 1QFY14 results. The company has reported 21.7% YoY growth in sales and 18.7% growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 21.7% YoY during the quarter. Strong performance is due to growth in biopharmaceutical segment and contract manufacturing business.
  • Operating margins improve by 0.6%, leading to EBITDA growth of 25.1% YoY. This is helped by marginal decline in other expenditure.
  • Bottomline increases by 18.7% YoY during 1QFY14. PAT is impacted by higher tax expenses (up 117%) during the quarter.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 5,709 6,948 21.7%
Expenditure 4,540 5,486 20.8%
Operating profit (EBDITA) 1,169 1,462 25.1%
EBDITA margin (%) 20.5% 21.0%  
Other income 217 284 30.9%
Interest (net) 32 4 -87.5%
Depreciation 427 483 13.1%
Profit before tax 927 1,259 35.8%
Tax 137 297 116.8%
Profit after tax/(loss) 790 962 21.8%
Minority Interest 2 27  
Net profit after minority int 788 935 18.7%
Net profit margin (%) 13.8% 13.5%  
No. of shares (m)   200.0  
Diluted earnings per share (Rs)   25.8  
Price to earnings ratio (x)*   12.2  
*based on trailing 12 months earnings
What has driven performance in 1QFY14?
  • Topline grew by 21.7% YoY during the quarter. The robust growth was on back of strong sales in biopharmaceuticals segment and contract research.

    Business mix
    (Rs m) 1QFY13 1QFY14 Change
    Biopharmaceuticals 3,625 4,395 21.2%
    (% of consolidated revenues) 63.5% 63.3%  
    Branded formulations 860 1,007 17.1%
    (% of consolidated revenues) 15.1% 14.5%  
    Contract manufacturing 1,224 1,546 26.3%
    (% of consolidated revenues) 21.4% 22.3%  
    Total 5,709 6,948 21.7%

  • Total Biopharmaceuticals segment sales increased by ~20% YoY for 1QFY14. The global biopharmaceutical segment grew by 21% YoY while domestic branded grew by 17% YoY. In constant currency terms, total Biopharmaceuticals grew by 19% YoY for the said period.

  • Domestic branded sales grew by 17% YoY during the quarter. Company's Insugen brand will soon touch Rs 1 bn mark. In 2QFY14, the company intends to launch Itolizumab in India.

  • The contract research segment grew by 26% YoY during the quarter. The company's revenues from the BMS contract continued to get impacted due to forex positions taken earlier. After expiry of these contracts, company expects this loss to go off. From 3QFY13 onwards, the company had incurred forex loss of Rs 110 m due to BMS contract.

  • Operating margins improved marginally by 0.6% to 21%. The other expenses for the quarter declined marginally. After, adjusting for forex component of Rs 74 m, which was included in the other expenses, the operating margins declined by 0.8%. Going forward, the other expenses will increase a bit, as the company will launch the new product Itolizumab in the Indian market. The sales and marketing expenses pertaining to this product will push the overall expenditure.

  • Bottomline increased by 18.7% YoY during 1QFY14. PAT was impacted by higher tax expenses (up 117%) during the quarter.

    Biocon's guidance on various segments

  • R&D expenses - For FY14, these expenses are expected to be above Rs 2 bn. This is because the company will be advancing trials of its various programs.

  • 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.

  • Forex - Company has incurred forex gain of Rs 80 m which is included in other income. As the forex contracts pertaining to BMS will expire in the upcoming quarter, the losses pertaining to this contract will go off.

  • Tax rate - Going forward, Biocon has guided for a tax rate of 22% for FY14.
What to expect?
At the current price of Rs 314, the stock is trading at a price to earnings multiple of 13.1 times our estimated FY16 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 failure in its R&D programs where the company is incurring huge costs. In light of the current valuations, we maintain a Hold rating on the stock.

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