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Biocon: Higher sales, lower margins

Oct 25, 2011

Biocon has announced its second quarter results for 2011-2012 (2QFY12). The company has reported 21% YoY increase in sales and 4.6% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 21% YoY, led by strong performance of biopharma and contract research services.
  • Operating margins (EBIDTA) decrease by 460 basis points (4.6%) on account of higher employee and raw material costs. Increase in R&D expenditure puts further pressure on margins.
  • Net profits, without considering AxiCorp, grow by a mere 4.6% YoY due to a sharp fall in operating margins.

Financial performance: A snapshot...
(Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
Net sales 4,203 5,084 21.0% 8,214 9,501 15.7%
Expenditure 2,906 3,750 29.0% 5,818 6,963 19.7%
Operating profit (EBDITA) 1,297 1,334 2.9% 2,396 2,538 5.9%
EBDITA margin (%) 30.9% 26.2%   29.2% 26.7%  
Other income 74 160 116.2% 156 283 81.4%
Depreciation 379 429 13.2% 742 880 18.6%
Interest 62 20 -67.7% 127 77 -39.4%
Profit before tax 930 1,045 12.4% 1,683 1,864 10.8%
Tax 111 188 69.4% 211 307 45.5%
Profit from Axicorp (discontinued) 73 -   188 -  
Profit after tax/(loss) 892 857 -3.9% 1,660 1,557 -6.2%
Net profit margin (%) 21.2% 16.9%   20.2% 16.4%  
No. of shares (m) 200 200   200 200  
Profit after tax without Axicorp 819 857 4.6% 1472 1557 5.8%
Diluted earnings per share (Rs) 4.5 4.3   8.3 7.8  
Price to earnings ratio (x)*         15.5  
*On a trailing 12 months basis

What has driven performance in 2QFY12?

  • Biocon's net sales grew by 21% YoY during the quarter supported by an all round growth in its business segments. The biopharma business that contributes 82% to sales grew by 21.5% YoY. Branded formulation business, a small part of the biopharma business, grew by 35% on the back of strong performance by the Diabetology and Comprehensive Care segments. The contract research business (Clingene and Syngene) that contributes the remaining 18% also grew at a healthy rate of 18.7% YoY.

  • Biocon also receives licensing income from Pfizer and Mylan which is highly variable in nature due to its dependency on regulatory approvals in various countries. For this quarter, the licensing income grew by 58% YoY from Rs 231 m to Rs 365 m and the licensing income at PAT level was Rs 60 m.

  • Revenue break-up
    (Rs m) 2QFY11 2QFY12 Change 6mFY11 6mFY12 Change
    Biopharma 2,941 3,509 19.3% 5,825 6,484 11.3%
    Biopharma (Branded) 480 647 34.8% 887 1,215 37.0%
    Sub Total 3,421 4,156 21.5% 6,712 7,699 14.7%
    Contract research 782 928 18.7% 1,502 1,802 20.0%
    Total Sales 4,203 5,084 21.0% 8,214 8,214 15.7%

  • Operating margins (EBIDTA) decreased by 460 basis points (4.6%) to 26.2% on account of higher employee and raw material costs. The employee costs rose by 25% YoY as the company recruited new employees for expanding its reach. This first led to a 180 bps fall in margins. The total headcount stood at 4,800 including 1,050 medical representatives (MR). The management has guided that the head count will increase substantially over next 12 months. Increase in raw material and power costs led to another 160 bps decrease in operating margins. The R&D expenditure also grew by 55% YoY and further put pressure on margins. The management had indicated that it would not be possible to rationalize the R&D cost every quarter and should therefore be looked at on a yearly basis.

  • Net profit, without considering AxiCorp, grew by a mere 4.6% YoY as due to lower operating margins and higher tax expenses.

  • Biocon launched Insupen in October 2011 based on German technology in three colors for insulin differentiation. This is priced at Rs 675 and will help save Rs 1,500 per year to the patients.

  • On the capex front, the company would be spending US$ 160 m in Malaysia over the next 2 to 3 years to establish a biosimilar manufacturing and R&D facility. The ground breaking at the site has started this quarter. Besides this, the regular capex required for Indian facilities would be in the range of US$ 130 m to US$ 150 m per year.
What to expect?
At the current price of Rs 348, the stock is trading at a multiple of 12.4 times our estimated FY14 earnings.

Biocon tied up with Pfizer in 2010-2011 to market its biosimilar products in the emerging and developed markets. As this tie-up will now take care of the marketing in Europe, Biocon has divested its stake in Axicorp. This coupled with better times for the contract research business, significant capital expenditure and further recruitment of employees should help Biocon to grow for the next few years. We maintain our positive view on the stock from a long term perspective.

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Jun 14, 2021 (Close)