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Biocon: Poor show all around - Views on News from Equitymaster
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Biocon: Poor show all around
Oct 22, 2014

Biocon has announced its 2QFY15 results. The company has reported 2.1% YoY growth in sales and a decline of 0.2% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 2.1% YoY during the quarter. While sales of Biopharmaceuticals decline, contract manufacturing witnesses muted growth.
  • Operating margins decline by 1% to 22% during the quarter leading to the 2% YoY fall in operating profits.
  • However, bottomline declines at a slower pace of 0.2% YoY during 2QFY15 aided by higher other income and substantial fall in tax expenses.

Financial performance: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 7,339 7,495 2.1% 14,287 14,681 2.8%
Expenditure 5,650 5,847 3.5% 11,056 11,360 2.7%
Operating profit (EBDITA) 1,689 1,648 -2.4% 3,231 3,321 2.8%
EBDITA margin (%) 23.0% 22.0%   22.6% 22.6%  
Other income 187 231 23.5% 391 465 18.9%
Interest (net) 3 50 1566.7% 7 56 723.5%
Depreciation 490 542 10.6% 983 1,061 7.9%
Profit before tax 1,383 1,287 -6.9% 2,632 2,669 1.4%
Exceptional Item 1 1        
Tax 330 218 -33.9% 616 527 -14.4%
Profit after tax/(loss) 1,054 1,070 1.5% 2,016 2,142 6.2%
Minority Interest 31 49 57.1% 58 92 58.6%
Net profit after minority int 1,023 1,021 -0.2% 1,958 2,050 4.7%
Net profit margin (%) 13.9% 13.6%   13.7% 14.0%  
No. of shares (m)         200.0  
Diluted earnings per share (Rs)         21.2  
Price to earnings ratio (x)*         22.3  

What has driven performance in 2QFY15?
  • Topline grew by 2.1% YoY during the quarter. Both the major segments viz., biopharmaceuticals and contract manufacturing were impacted during the quarter.

    Business mix
      2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Biopharmaceuticals 4,469 4,414 -1.2% 8,864 8,771 -1.0%
    (% of consolidated revenues) 60.9% 58.9%   62.0% 59.7%  
    Branded formulations 989 1,160 17.3% 1,996 2,265 13.5%
    (% of consolidated revenues) 13.5% 15.5%   14.0% 15.4%  
    Contract manufacturing 1,881 1,921 2.1% 3,427 3,645 6.4%
    (% of consolidated revenues) 25.6% 25.6%   24.0% 24.8%  
    Total 7,339 7,495 2.1% 14,287 14,681 2.8%

  • The growth in Biopharmaceutical segment was impacted by the turmoil in the MENA region and temporary discontinuation of Fidaxomicin to its supplier. The disruptions in MENA region are temporary and are expected to normalize in the next couple of months. The company is trying to mitigate this negative impact by moving to other regions. Revenues from this region are less than 20%. Having said that, sales of biopharma are expected to remain under pressure. The contract manufacturing sales will ramp up in the upcoming period.

  • The poor topline performance impacted the operating margins as well. The margins dipped by 1% to 22% during the quarter. As a result, operating profits fell by 2% YoY.

  • However, bottomline declined at a slower pace of 0.2% YoY during 2QFY15 aided by higher other income and substantial fall in tax expenses. On the other hand, there was a rise in interest costs. According to the management, this was due to some short term loans taken. This is expected to normalize in the next couple of quarters.
What to expect?
At the current price of Rs 473, the stock is trading at a price to earnings multiple of 14 times our estimated FY17 earnings.

While the Indian branded segment and contract research segment remain the key drivers for the company, the biopharmaceutical segment is a concern. As the turmoil in the Middle East has intensified, the company is exiting from this market and entering new geographies. Thus, it will take some time for the company to ramp up the sales from this segment. Other than this, capacity constraint is another issue atleast till the Malaysian facility becomes operational in late 2016 or early 2017. Over and above, the other risk is a possible failure in its R&D programs where the company is incurring huge costs. The current valuations do not offer much margin of safety and thus we reiterate our Sell view on the stock.

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