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Biocon: Tepid quarter - Views on News from Equitymaster
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Biocon: Tepid quarter
Aug 8, 2015

Biocon has announced its 1QFY16 results. The company has reported 14.8% YoY growth in total income and 22.8% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 14.8% YoY during the quarter, largely driven by contract manufacturing segment.
  • Operating margins improve by 1.5%, consequently even the operating profits grow by 22% YoY for the quarter.
  • Net profits are up by 22.8% YoY in tandem with the growth in operating profits and also helped by the surge in other income.

Financial performance: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 7,253 8,330 14.8%
Expenditure 5,514 6,208 12.6%
Operating profit (EBDITA) 1,739 2,122 22.0%
EBDITA margin (%) 24.0% 25.5%  
Other income 166 235 41.7%
Interest (net) 6 44 636.7%
Depreciation 519 578 11.4%
Profit before tax 1,380 1,735 25.7%
Tax 309 370 19.6%
Profit after tax/(loss) 1,071 1,365 27.4%
Minority Interest 43 103 139.3%
Net profit after minority int 1,028 1,262 22.8%
Net profit margin (%)   15.2%  
No. of shares (m)   200.0  
Diluted earnings per share (Rs)   25.9  
Price to earnings ratio (x)*   17.7  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • Excluding other operating income, net sales grew modestly by 8.4% YoY during the quarter.

    Business Mix
      1QFY15 1QFY16 Change
     
    Biopharmaceuticals 4,361 4,875 11.8%
    (% of consolidated revenues) 60% 59%  
    Branded Formulations 1,106 1,120 1.3%
    (% of consolidated revenues) 15% 13%  
    Contract Manufacturing 1,786 2,336 30.8%
    (% of consolidated revenues) 25% 28%  
    Total 7,253 8,330 14.8%

  • Excluding the income from Merck worth Rs 446.3 m, the biopharmaceutical segment has grown by a mere 1.5% YoY. This income received from Merck (Biocon's customer for Fidoximycin), is towards one time compensation to absolve capacity reservation fees. The sales in this segment were partly impacted by shut down of facility during 1QFY16. The Indian branded formulations too witnessed poor growth at 1.3% YoY. The company continues to focus on high margin products and expects performance to improve going forward.

  • The contract manufacturing witnessed healthy growth of 30.8% YoY. Since the company has recently come up with the IPO, the company did not give any update on this business during the quarter.

  • On the operating front, the margins improved largely on back of one-time income from Merck. Excluding this, the margins have declined by 2.7% YoY. It is also imperative to note the R&D expenses for the quarter surged by 60% YoY for the quarter.

  • The other income for the quarter was up by 41.7% YoY and also contributed to the growth in the bottomline.
What to expect?
At the current price of Rs 461, the stock is trading at a price to earnings multiple of 17.1 times our revised estimated FY17 earnings.

Biocon's biopharmaceuticals segment continues to remain under pressure, while the contract manufacturing continues to grow at a healthy pace. The contract research and branded formulations segment will be important drivers for the company. But, the biopharmaceutical segment is a concern at least till the Malaysian facility starts actively contributing to the company's revenues. The company has recently launched one of its key compounds Glargine in Mexico and Columbia. While the company continues to heavily spend on R&D, the failure of the programs can negatively hit the company's financials.

We are in process of updating our estimates, till then investors should not buy the stock at current levels.

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