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  • April 30, 2018

    ICICI Securities Ltd | Retail Equity Research

    Result Update

    Biologics, Syngene maintain momentum

    Revenues increased 26% YoY to | 1170 crore (I-direct estimate: |

    1098 crore) mainly due to 48% YoY growth in Biologics to | 241

    crore (I-direct estimate: | 179 crore) and 45% YoY growth in

    Syngene to | 409 crore (I-direct estimate: | 359 crore).

    EBITDA margins remained at 20%, however lower than I-direct

    estimates of 22.0% mainly due to lower gross margins led by change

    in product mix. EBITDA increased 24% YoY to | 233 crore

    Net profit increased 2% YoY to | 130 crore (I-direct estimate: | 114

    crore). Delta vis-a-vis operational growth was mainly due to higher

    interest cost, depreciation and Tax rate (21.6% vs 6.7% in Q4FY17)

    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 approval in

    the US, Glargine launch in Japan and approval in EU and Australia

    besides launches in emerging markets. We expect biologics to grow at

    ~40% CAGR to | 1506 crore in FY18-20E.

    Research services (Syngene) to maintain growth momentum

    Biocons 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 | 2011 crore in FY18-20E.

    Small molecules under pressure; branded formulations growing decently

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

    immunosuppressants, specialty APIs & also include generic formulations

    business is witnessing steep pricing pressure in the US. 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 7% CAGR to |

    1685 crore in FY18-20E. The branded formulations (14% of FY18 total

    revenue) includes finished dosages business in India and overseas

    including UAE. It comprises Indian domestic formulations. The company

    owns 80+ brands encompassing therapies like diabetology, oncology,

    nephrology, cardiology, immunotherapy etc.

    Biosimilar deals, approvals and launches to sustain investors interest

    Apart from the strong performance in Biologics and Syngene, Key

    highlight for FY18 was biosimilar approvals from developed markets.

    Although these approvals do not imply immediate launch of the product

    in these regions, it endorses the development and manufacturing

    capabilities of Biocon in the realm of biosimilars. Partnership in the

    biosimilars space with Sandoz for global development of next generation

    biosimilars has once again vindicated its capability in biosimilars.

    Progress on the biosimilars regulatory front in developed markets and

    launches in the developed as well as emerging markets are likely to

    maintain investors optimism for the company. We continue to value the

    stock on SOTP basis. Accordingly, we arrive at a target price of | 740 per

    share.

    Rating matrix

    Rating : Buy

    Target : | 740

    Target Period : 12 months

    Potential Upside : 14%

    Whats Changed?

    Target Changed from | 680 to | 740

    EPS FY18E Changed from | 8.4 to | 6.2

    EPS FY19E Changed from | 11.9 to | 9.3

    EPS FY20E Changed from | 16.9 to | 14

    Rating Unchanged

    Quarterly Performance

    Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%)

    Revenue 1,169.5 931.1 25.6 1,057.9 10.5

    EBITDA 233.0 187.5 24.3 221.7 5.1

    EBITDA (%) 19.9 20.1 -21 bps 21.0 -103 bps

    Net Profit 130.4 127.5 2.3 91.9 41.9

    Key Financials

    (| Crore) FY17 FY18E FY19E FY20E

    Revenues 3921.6 4129.7 5148.9 6115.5

    EBITDA 851.2 829.1 1204.4 1583.8

    Adj. Net Profit 508.7 372.4 558.2 839.2

    Adj. EPS (|) 8.5 6.2 9.3 14.0

    Valuation summary

    FY17 FY18E FY19E FY20E

    PE(x) 63.9 105.0 70.1 46.6

    EV to EBITDA (x) 10.5 7.2 9.8 13.0

    Price to book (x) 9.6 8.4 11.3 14.7

    RoNW (%) 45.8 47.2 32.6 24.8

    RoCE (%) 9.6 8.4 11.3 14.7

    Stock data

    Particular

    Market Capitalisation

    Debt (FY18)

    Cash (FY18)

    EV

    52 week H/L 439/268

    Equity capital (|Crore)

    Face value (|) | 5

    | 300 crore

    | 39709 crore

    Amount

    | 39111 crore

    | 1920 crore

    | 1322 crore

    Price performance (%)

    1M 3M 6M 1Y

    Biocon 15.0 8.7 79.2 76.1

    Glenmark 5.8 -10.1 -4.7 -35.9

    Torrent Pharma 12.0 -0.6 13.2 -0.8

    Aurobindo Pharma 14.9 -0.9 -15.2 1.9

    Research Analyst

    Siddhant Khandekar

    siddhant.khandekar@icicisecurities.com

    Mitesh Shah

    mitesh.sha@icicisecurities.com

    Biocon (Biocon) | 652

  • ICICI Securities Ltd | Retail Equity Research Page 2

    Variance analysis

    Q4FY18 Q4FY18E Q4FY17 Q3FY18 YoY (%) QoQ (%) Comments

    Revenue 1,169.5 1,098.1 931.1 1,057.9 25.6 10.5 YoY growth and beat I-Direct estimates was mainly due to robust growth in

    Biologics and contract research segments

    Raw Material cost 475.2 428.9 348.4 423.8 36.4 12.1 YoY 321 bps contraction in gross margins to 59.4% was mainly due to adverse

    product mix

    Employee cost 257.0 241.6 193.9 235.3 32.5 9.2 Increased mainly due to commissioning of Malaysian facility

    R & D Expenditure 51.0 54.7 65.0 52.9 -21.5 -3.6

    Other Expenditures 153.3 131.8 136.3 124.2 12.5 23.4

    Total Expenditure 936.5 857.0 743.6 836.2 25.9 12.0

    EBITDA 233.0 241.1 187.5 221.7 24.3 5.1

    EBITDA (%) 19.9 22.0 20.1 21.0 -21 bps -103 bps Higher raw material and employee cost was largely offset by lower R&D spend and

    other expenditure

    Interest 16.9 14.7 5.0 14.7 238.0 15.0 Increased mainly due to commissioning of Malaysian facility

    Depreciation 95.3 97.4 72.5 97.4 31.4 -2.2 Increased YoY mainly due to commissioning of Malaysian facility

    Other income 67.5 43.4 43.2 33.9 56.3 99.1 Includes | 42 crore of forex gain against | 17 crore of forex loss in Q4FY17

    EO 0.0 0.0 0.0 0.0 0.0 0.0

    PBT 188.3 172.5 153.2 143.5 22.9 31.2

    Tax 40.7 43.1 10.3 36.1 295.1 12.7

    MI 22.3 22.0 20.9 21.7 6.7 2.8

    PAT 130.4 113.6 127.5 91.9 2.3 41.9 Delta vis--vis EBITDA was due to higher Interest, Depreciation and Taxation. Beat

    vis--vis I-Direct estimates mainly due to higher forex gain

    Key Metrics

    Small Molecules 424.0 379.3 379.0 357.0 11.9 18.8 YoY growth and beat I-Direct estimates was due to higher uptake in key statins

    and rosuvastatin formulations and a steady performance by immunosuppressants

    Biologics 241.0 178.5 163.0 189.8 47.9 27.0

    YoY growth was due to strong growth in key Insulins business markets like

    Mexico, Malaysia and the AFMET region and expansion of biosimilar Trastuzumab

    footprint in emerging markets. Beat vis--vis I-Direct estimates mainly due to

    awarded tender contract in some emerging markets

    Branded Formulations 149.0 157.2 131.0 156.1 13.7 -4.5 YoY growth was mainly due to strong growth key products in India and robust

    growth in UAE led by increase sales in key branded generic products

    Contract Research 409.0 359.0 283.0 387.7 44.5 5.5 YoY growth lower base of Q4FY17 (fire incident impact) and strong growth in

    chemical development and discovery services supported by biologics business.

    Beat vis--vis I-Direct mainly due higher-than-expected growth in chemical

    development and biologics business

    Licensing income 2.0 12.0 16.0 11.8 -87.5 -83.1

    Source: Company, ICICI Direct Research

    Change in estimates

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

    Revenues 4,921.5 5,148.9 4.6 5,801.9 6,115.5 5.4 Increased mainly due to strong growth in Q4FY18

    EBITDA 1,273.1 1,204.4 -5.4 1,557.8 1,583.8 1.7

    EBITDA Margin (%) 25.9 23.4 -251 bps 26.8 25.9 -95 bps

    Net Profit 711.3 558.2 -21.5 1,015.5 839.2 -17.4 Changed mainly due to change in expectation of other income

    EPS (|) 11.9 9.3 -21.8 16.9 14.0 -17.2

    FY19E FY20E

    Source: Company, ICICI Direct Research

    Assumptions

    Current

    Growth (%) FY17 FY18E FY19E FY20E FY19E FY20E

    Biopharmaceuticals 2,230.0 2,256.1 2,635.7 3,190.8 2,460.3 2,956.3 Increased mainly due to strong growth in Q4FY18

    Branded Formulations 548.9 611.5 689.8 793.2 699.2 804.1

    Contract Research 1,192.7 1,423.1 1,703.4 2,011.4 1,602.1 1,874.5 Increased mainly due to strong growth in Q4FY18

    Licensing income 144.2 22.8 120.0 120.0 120.0 120.0

    Earlier

    Source: Company, ICICI Direct Research; * excludes Licensing income

  • ICICI Securities Ltd | Retail Equity Research Page 3

    Company Analysis

    Biocon was established in 1978 by first generation entrepreneur Dr Kiran

    Mazumdar-Shaw. Unlike most pharma companies that are chemical