PowerYourTrade: Multibagger – Biocon

Topline in line with expectation: Biocon posted its Q4 FY09 numbers. The topline of the company grew at a robust rate of 76% to Rs 468 crore compared to Rs 266.6 crore. The bio pharma segment of Biocon recorded a growth of 86.6% to Rs 411.4 crore compared to Rs 220.5 crore during the corresponding period last year. The revenue from contract research grew by 49% to Rs 71.6 crore whereas last year it was Rs 47.9 crore.

Bleak performance at the Operating level: Biocon though recorded strong growth numbers at the topline, had a dismal performance at the operating level. The operating profit of the company had shown a de growth of 4% QoQ, to Rs 91.5 crore against Rs 95.2 crore. The margins of the company witnessed the heat of increasing expenses and had shrunk by 1157 bps YoY.

Bottom Line – In line with our expectation: The bottom line of the company was again hit by the forex loss. The net profit before exceptional loss was Rs 74.9 crore, but the company suffered the forex loss of Rs 41.4 crore and minority interest loss of Rs 9 crore thereby reducing the bottom-line to Rs 24.8 crore. The bottom-line is also impacted by the increase in depreciation expenses (44% YoY) and interest cost (187% YoY).

Our View: Change in forex hedging policy – way to cap forex losses: Biocon has changed its forex hedging policy to insured options from fixed price forward contracts. According to its new policy, ~25% of Biocon’s FY10 export revenues are hedged using a collar option structure which will enable Biocon to gain from the depreciation in the rupee until USD/INR rate of 55 as well as protect it from an appreciation in rupee till Rs 46.

Biocon has also bought put options for the remaining 75% of its FY10 exports at a strike price of Rs 50. This will enable Biocon to benefit from the weakening rupee going forward while protecting any downside at Rs 50. We believe this policy change is a welcome move for the company, and with this policy the company would be able to reduce any uncertainty related to forex losses.

We expect strong revenue visibility from the branded formulations business of the company coupled with AxiCorp starting with AOK supply of metformine. The robust R&D in the bio generics as well as novel biogenerics program is expected to realize significant returns over the medium to long term. Going forward, we see lucrative opportunities in all the segments of Biocon.

Performance highlights (FY09): Consolidated revenue (including AxiCorp) increases 53% from Rs 1, 090 crore to Rs 1,673 crore. Whereas revenue excluding AxiCorp increases by 10% from Rs1, 090 crore to Rs 1,194 crore. Sales revenue from research services grew 28% to Rs 225 crore from Rs176 crore in FY09. The operating profit of Syngene and Clinigene grew 21% to Rs 70 crore, but due to huge MTM loss the profit earnings resulted in a loss of Rs18 crore for the year. Operating margins (excluding AxiCorp) maintained at 31% level. MTM losses provided at Rs 147 crore for the year. R&D Expenditure increases by 27% to Rs 60 crore. Net Profit after MTM losses declined to Rs 93 crore, whereas Net profit before MTM loss stands at Rs 248.2 crore. Oral Insulin IN105 has entered into phase III clinical trials whereas for T1h, a novel monoclonal antibody the recruitment for patients for IIb clinical trials has been completed.

Particulars

FY08

FY09

FY10E

FY11E

Revenue

1053.8

1616.5

1891.3

2206.6

EBITDA

298.6

331.2

406.6

496.5

OPM

28.30%

20.50%

21.50%

22.50%

Net Profit

463.5

93.1

303.8

338.3

NPM

44%

5.80%

16.10%

15.30%

EPS

23.2

4.7

15.2

16.9

P/E

6.1

30.4

9.3

8.4

ROCE

16.10%

14.70%

16.60%

17%

RONW

31.20%

6.10%

18.30%

17.40%

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