Biocon (Biocon) | Biocon was established in 1978 by first generation entrepreneur Dr Kiran Mazumdar-Shaw

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  • January 25, 2019

    ICICI Securities Ltd | Retail Equity Research

    Result Update

    Well rounded growth; beat on all fronts…

     Biocon’s Q3FY19 numbers were a comprehensive beat vis-à-vis I-

    direct estimates on all fronts. Revenues grew 45.6% YoY to | 1540.8

    crore (I-direct estimate: | 1382.4 crore) mainly due to 136.6% YoY

    growth in biologics to | 449 crore (I-direct estimate: | 379.6 crore)

     EBITDA margins improved 375 bps YoY to 24.7% (I-direct estimate:

    26.2%) mainly due to improvement in product mix. EBITDA grew

    71.7% YoY to | 380.7 crore against I-direct estimates of | 362.1 crore

     Adjusted net profit grew 131.6% to | 212.9 crore (I-direct estimate:

    | 188.7 crore) mainly due to strong operational performance and

    lower tax rate (16.7% vs. 25.2% in Q3FY18)

    Well poised to capitalise on global biosimilars opportunity

    Biologics segment (18% of FY18 in total revenues) includes biosimilars,

    encompassing Rh-insulin, insulin analogs, monoclonal antibodies &

    recombinant proteins. It is the first Indian pharmaceutical company to

    receive biosimilar approval in US. The company has invested heavily in

    this space in the last two to three years, especially the Malaysian facility.

    So far, the progress has been encouraging with Trastuzumab and

    Pegfilgrastim approvals (and the launch of latter) in the US, Adalimumab

    in EU and Glargine launch in Japan, EU and Australia besides launches in

    emerging markets. We expect biologics to grow at 58% CAGR to | 3060

    crore in FY18-21E.

    Research services (Syngene) to maintain growth momentum

    Biocon’s contract research organisation (CRO) arm Syngene contributes

    33% of total revenues. The company caters to 316 clients including eight

    out of global top 10 global players. This segment has consistently been

    growing in double digits and has recently been the major growth driver

    for the company as the small molecules segment is slowing down. We

    expect revenues to grow at a CAGR of 19% to | 2401 crore in FY18-21E.

    Small molecules start showing promising growth

    Small molecules (35% of FY18 total revenue) comprise APIs like statins,

    immunosuppressants, specialty APIs & also include generic formulations

    business. The company is exploring fewer opportunities but with higher

    profitability in this segment like moving into formulations & filing own

    ANDAs, 505 (b)(2) filing, etc. It has already filed few ANDAs, which include

    complex generics & injectables. We expect small molecules segment to

    grow at a CAGR ~14% CAGR to | 2222 crore in FY18-21E. The branded

    formulations (14% of FY18 total revenue) includes finished dosages

    business in India and UAE. It comprises Indian domestic formulations.

    The company owns 80+ brands encompassing therapies like

    diabetology, oncology, nephrology, cardiology, immunotherapy etc.

    Biosimilar deals, approvals, launches to sustain investors interest

    Robust Q3 performance was primarily driven by biologics segment on the

    back of new launches across developed and emerging markets and

    geographical expansion in emerging markets. Overall, FY19 panning out

    on a strong footing mainly due continuous strong traction in its “growth

    segments” (Biologics and Syngene). Small molecules segment has also

    started showing promising growth. Strong growth in biologics is likely to

    improve overall margins as well. Thus, progress on the biosimilars

    regulatory front in developed markets and launches in the developed as

    well as emerging markets are likely to be key levers for the company. We

    value the stock on SOTP basis. Accordingly, we arrive at a target price of

    | 760 per share.

    Rating matrix

    Rating : Buy

    Target : | 760

    Target Period : 12 months

    Potential Upside : 14%

    What’s Changed?

    Target Unchanged

    EPS FY19E Changed from | 11.5 to | 17.3

    EPS FY20E Changed from | 15.4 to | 27.4

    Rating Unchanged

    Quarterly Performance

    Q3FY19 Q3FY18 YoY (%) Q2FY19 QoQ (%)

    Revenue 1,540.8 1,057.9 45.6 1,321.0 16.6

    EBITDA 380.7 221.7 71.7 339.6 12.1

    EBITDA (%) 24.7 21.0 375 bps 25.7 -100 bps

    Net Profit 212.4 91.9 131.1 165.9 28.0

    Key Financials

    (| Crore) FY18 FY19E FY20E FY21E

    Revenues 4129.7 5619.7 7201.0 8569.2

    EBITDA 829.1 1391.6 1840.3 2261.2

    Adj. Net Profit 372.4 767.1 1038.6 1645.8

    Adj. EPS (|) 6.2 12.8 17.3 27.4

    Valuation summary

    FY18 FY19E FY20E FY21E

    PE(x) 107.0 43.2 38.4 24.2

    EV to EBITDA (x) 7.2 12.8 15.0 19.5

    Price to book (x) 8.1 13.1 15.4 17.7

    RoNW (%) 48.0 28.6 21.5 17.1

    RoCE (%) 8.1 13.1 15.4 17.7

    Stock data

    Particular

    Market Capitalisation

    Debt (FY18)

    Cash (FY18)

    EV

    52 week H/L 718/543

    Equity capital (|Crore)

    Face value (|) | 5

    | 300 crore

    | 41143 crore

    Amount

    | 40578 crore

    | 1620 crore

    | 1055 crore

    Price performance (%)

    1M 3M 6M 1Y

    Biocon 10.3 9.0 21.8 11.1

    Glenmark -4.3 5.7 14.8 2.4

    Torrent Pharma 6.0 18.9 26.8 33.3

    Aurobindo Pharma 10.0 9.3 34.5 23.4

    Research Analyst

    Siddhant Khandekar

    siddhant.khandekar@icicisecurities.com

    Mitesh Shah

    mitesh.sha@icicisecurities.com

    Biocon (Biocon) | 664

  • ICICI Securities Ltd | Retail Equity Research Page 2

    Variance analysis

    Q3FY19 Q3FY19E Q3FY18 Q2FY19 YoY (%) QoQ (%) Comments

    Revenue 1,540.8 1,382.4 1,057.9 1,321.0 45.6 16.6 YoY growth mainly due to 137% growth in Biological segment. Beat vis-à-vis I-

    Direct estimates due to higher-than expected growth across segments

    Raw Material cost 528.1 484.7 423.8 446.7 24.6 18.2 YoY improvement mainly due to better product mix

    Employee cost 294.4 293.6 235.3 288.9 25.1 1.9

    R & D Expenditure 77.0 76.1 52.9 77.0 45.6 0.0 Gross R&D spend was | 120 crore in Q2FY19

    Other Expenditures 260.6 165.9 124.2 168.8 109.8 54.4 YoY increase and miss vis-à-vis I-Direct estimates mainly due to higher profit

    sharing and forex loss

    Total Expenditure 1,160.1 1,020.3 836.2 981.4 38.7 18.2

    EBITDA 380.7 362.1 221.7 339.6 71.7 12.1

    EBITDA (%) 24.7 26.2 21.0 25.7 375 bps -100 bps YoY improvement mainly due to better product mix

    Interest 18.6 18.8 14.7 18.8 26.5 -1.1

    Depreciation 116.7 112.2 97.4 112.2 19.8 4.0

    Other income 25.6 56.9 33.9 54.4 -24.5 -52.9

    EO -5.8 0.0 0.0 -188.8 0.0 NA

    PBT 276.8 288.0 143.5 451.8 92.9 -38.7

    Tax 46.1 72.0 36.1 73.2 27.7 -37.0

    MI 26.0 26.4 21.7 23.0 19.8 13.0

    Adj. PAT 212.4 188.7 91.9 165.9 131.1 28.0 Strong growth and beat vis-à-vis I-Direct estimates mainly due to strong

    operational performance and lower tax rate (16.7% vs 25.2% in Q3FY18)

    Key Metrics

    Small Molecules 462.0 410.6 357.0 427.0 29.4 8.2 YoY growth largely driven by robust sales in APIs and continued growth in the US

    generic business. Beat vis-à-vis I-Direct estimates mainly due to higher than

    expected traction from new launches

    Biologics 449.0 379.6 189.8 367.0 136.6 22.3 YoY growth and beat vis-à-vis I-Direct estimates was on the back of strong

    performance across portfolio of insulins, monoclonal antibodies (MAbs) and other

    biologics in key developed and emerging markets

    Branded Formulations 212.0 156.1 156.1 164.0 35.8 29.3 YoY growth and beat vis-à-vis I-Direct estimates was mainly due to one-off sales in

    the UAE

    Contract Research 467.0 431.1 387.7 419.0 20.5 11.5 YoY growth mainly on the back of 1) decent traction in discovery services and

    biologics businesses, 2) scientists ramp up and 2) favorable currency movement

    (6%). Excluding currency impact and one-offs, adjusted YoY growth was ~18%

    Licensing income 7.0 5.0 11.8 5.0 -40.7 40.0

    Source: Company, ICICI Direct Research

    Change in estimates

    (| Crore) Old New % Change Old New % Change

    Revenues 5,400.4 5,619.7 4.1 7,164.7 7,201.0 0.5 Changed mainly due to better than expected sales in 3QFY19

    EBITDA 1,342.9 1,391.6 3.6 1,877.5 1,840.3 -2.0

    EBITDA Margin (%) 24.9 24.8 -14 bps 26.2 25.6 -64 bps Factored in higher transfer of profit sharing to partner for EM sales

    Net Profit 692.9 767.1 10.7 925.6 1,038.6 12.2 Delta vis-à-vis EBITDA mainly due change in tax assumption and increase other

    income and lower interest cost due to expected higher free cash flow

    EPS (|) 11.5 12.8 11.2 15.4 17.3 12.4

    FY19E FY20E

    Source: Company, ICICI Direct Research

    Assumptions

    Current

    Growth (%) FY17 FY18 FY19E FY20E FY19E FY20E

    Small Molecules 1,607.5 1,484.9 1,771.6 1,984.2 1,720.2 1,926.6 Changed mainly due to better than expected sales in 3QFY19

    Biologics 622.5 770.2 1,548.0 2,353.9 1,430.4 2,304.6 Changed mainly due to better than expected sales in 3QFY19

    Branded Formulations 548.9 611.5 689.9 772.7 652.7 731.0 Changed mainly due to better than expected sales in 3QFY19

    Contract Research 1,192.7 1,423.1 1,784.7 2,070.2 1,717.3 2,182.5 Changed mainly due change in currency expectations

    Earlier

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