Result Update Rating matrix Rating : Buy Target : 432 Target Period : 12-15 months Potential Upside : 24 % Key Financials ( Crore) FY10 FY11 FY12E FY13E Net Sales 2368 2770 2230 2670 EBITDA 471 592 646 811 Net Profit 293 368 386 480 Valuation summary FY10 FY11 FY12E FY13E EPS ( ) 14.7 18.4 19.3 24.0 PE (x) 23.7 18.9 18.0 14.5 Target PE (x) 29.5 23.5 22.4 18.0 EV to EBITDA (x) 15.5 11.5 10.6 8.5 Price to book (x) 3.9 3.4 3.0 2.5 RoNW (%) 16.7 18.1 16.5 17.6 RoCE (%) 15.6 19.3 18.7 20.9 Stock data Market Capitalisation 6940 crore Debt (FY11) 334 crore Cash (FY11) 441 crore EV 6833 crore 52 week H/L 456/301 Equity capital ( Crore) 100 crore Face value ( ) 5 MF Holding (%) 10.8 FII Holding (%) 4.8 Price movement 6, 6,000 5,700 5, 5,100 4,800 4,500 Nov-10 Analyst s name Jan-11 Price (R.H.S) Apr-11 Siddhant Khandekar siddhant.khandekar@icicisecurities.com Krishna Kiran Konduri krishna.konduri@icicisecurities.com Jul-11 Nifty (L.H.S) Oct-11 450 350 250 WHAT S CHANGED October 21, 2011 PRICE TARGET...Unchanged EPS (FY09E)...Unchanged EPS (FY10E)...Unchanged RATING...Unchanged Back on track Biocon s Q2FY12 results were more or less in line with our expectations. Net sales increased by 21% to 508.44 crore in line with our expectation of 520 crore, driven by both biopharmaceuticals (up 21%) and research services business (up 19%). Licensing income during the quarter stood at 37 crore against our expectation of 35 crore. In the quarter under review, Pfizer launched two insulin products in the domestic market. EBITDA margins declined by 390 bps to 27.2% on a YoY basis on the back of an increase in the R&D cost and employee cost. Despite pressure on EBITDA margins, the net profit stood at 85.7 crore as against our expectation of 87 crore on the back higher other income. We have maintained our BUY rating on the stock. Our analysis in the report is based after excluding Axicorp numbers in Q2FY11. Reusable pen device launched in domestic market Biocon (BIOCON) Biocon has recently launched reusable insulin delivery device INSUPen in the domestic market. INSUPen is a differentiated device based on proprietary German technology designed for efficiency, accuracy and safety. INSUPen is a device, which can deliver both Basalog and Insugen. The company has recruited 125 diabetic care advisors to support the users. Improvement consistency visible in R&D services business 347 The R&D services business has been witnessing double digit growth in the last three or four quarters. During the quarter, the sales increased by 19% YoY to 92.8 crore on the back of expanded business from existing clients and the addition of new clients. Net profit margins increased from 11% in Q1FY12 to 15% in the quarter under review. Valuation Traction from Fidaxomicin supplies, launches in the diabetic space and revival in R&D income are some of the strongholds for Biocon. It is currently trading at ~18x FY12E EPS of 19.3 and 14.5x ~ FY13E EPS of 24. We have valued the stock at 18x FY13E EPS of 24 i.e. 432 maintaining our BUY rating. We also recommend that investors who bought the stock at the time of earlier reports hold the same. Exhibit 1: Financial Performance ( Crore) Q2 FY12A Q2 FY12E Q2FY11 Q1FY12 YoY Gr.(%) QoQ Gr.(%) Net Sales 508.4 520.0 420.4 441.7 21.0 15.1 EBITDA 138.5 153.0 141.4 122.1-2.1 13.4 EBITDA Margin (%) 27.2 29.4 33.6 27.7 Depreciation 42.9 46.0 37.9 45.1 13.3-4.8 Interest 2.0 5.0 6.2 5.7-67.4-64.4 Reported PAT 85.7 87.4 81.8 70.1 4.8 22.3 EPS ( ) 4.3 4.4 4.1 3.5 ICICI Securities Ltd Retail Equity Research
Lower licensing of 37 crore as against 23 crore in Q2FY11 Exhibit 2: Biopharma business grows by 21% YoY Net sales up 21% YoY Biocon s net sales on a comparable basis grew by 21% to 508.44 crore in line with our expectation of 520 crore, driven by both the biopharmaceuticals and research services business. Licensing income during the quarter stood at 37 crore vs. our expectation of 35 crore. Exhibit 3: R&D services increased by 19% YoY 350 250 200 150 100 50 0 309 354 349 340 379 95 90 85 80 75 70 78 79 89 87 93 BioPharma* R&D services Source: Company, ICICIdirect.com, Research; * excluding licensing income Source: Company, ICICIdirect.com, Research The biopharmaceutical business increased by 21% YoY to 415.6 crore mainly on the back of strong growth in branded formulations business. The biopharma business excluding licensing income grew by 18% YoY mainly on the back of Fidaxomicin Anti-infective (API) supplies to Optimer. Biocon started supplying Fidaxomicin from June 2011. The company is the sole supplier for the innovator. As Optimer is witnessing incremental demand, the API offtake from Biocon would increase, going ahead. Pfizer launched Human Insulin and Glargine in the Indian market during the quarter Exhibit 4: Lower licensing income The branded formulation business witnessed robust growth of 30% to 64 crore due to strong growth in the diabetology and cardiology segments. As per AIOCD data, the diabetology and cardiology segment registered strong growth of ~18%. During the quarter, Pfizer launched Human Insulin and Glargine under the brand names Univia and Glavia in India. The research services business witnessed healthy growth of 19% YoY to 92.8 crore on the back of expansion by existing clients and the addition of new clients. Exhibit 5: Sales up by 21% 100 80 60 40 20 22 77 32 14 37 600 500 200 100 409 510 469 442 508 0 0 Licensing Income Net sales Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research ICICI Securities Ltd Retail Equity Research Page 2
The company recently launched reusable insulin delivery device INSUPen in the domestic market. INSUPen is a differentiated device based on proprietary German technology designed for efficiency, accuracy and safety. INSUPen is a device, which can deliver both Basalog and Insugen. The company has recruited 125 diabetic care advisors to support the users. EBITDA margins remain flat EBITDA margins declined by 390 bps to 27.2% on a YoY basis on the back of an increase in the R&D cost and employee cost. With increase in the employees in both R&D and manufacturing space, the employee cost increased by 150 bps to 15.3% as a percentage of sales. The R&D cost during the quarter stood at 31 crore as against 20 crore in the corresponding previous period. Despite higher licensing income, contribution at the EBITDA level during the quarter was 10 crore compared to 23 crore in Q2FY12 on the back of certain development and regulatory costs. Hence, despite strong growth in sales, the EBITDA in value terms increased by 5.9% to 138.5 crore below our expectation of 153 crore. Net profit up by 4.7% YoY Other income during the quarter was higher by 77.6% to 11 crore while interest cost declined by 67% to 2 crore and PBT increased by 12.5% to 104.5 crore. The higher tax rate of 18% as against 12% in the corresponding previous period restricted net profit growth to 4.7% at 85.7 crore. The net profit for R&D services stood at 14 crore during the quarter. Valuation The branded formulations business of the company has posted strong double digit growth and is expected to maintain the same on account of all six therapeutic categories. Biocon has a focussed approach in the diabetology space, be it launch of human insulin and Glagine by Pfizer in India in line with the recent agreement, or the much awaited launch of INSUPen. Similarly, we expect good traction from the Fidaxomicin supplies to Optimer as Optimer has upgraded its sales forecast of Deficid from US$1 billion to US$2 billion (as per management). Till now, Biocon remains the sole supplier. The rejuvenated R&D performance also augurs well in the long run. We expect sales and profits (after adjusting Axicorp numbers in FY11) to grow at a CAGR of 22% and 20%, respectively, between FY11 and FY13E. Biocon is currently trading at ~18x FY12E EPS of 19.3 and 14.5x ~ FY13E EPS of 24. We have valued Biocon at 18x FY13E EPS of 24 i.e. 432 maintaining our BUY rating. We also recommend that investors who bought the stock at the time of earlier reports hold the same. Exhibit 6: Valuation Matrix Sales ( Cr) EPS ( ) PE(x) EV/E (x) RoNW (%) RoCE (%) FY10 2367.8 14.7 23.7 15.5 16.7 15.6 FY11 2770.5 18.4 18.9 11.5 18.1 19.3 FY12E 2230.3 19.3 18.0 10.6 16.5 18.7 FY13E 2670.4 24.0 14.5 8.5 17.6 20.9 ICICI Securities Ltd Retail Equity Research Page 3
ICICIdirect.com coverage universe (Pharma) Elder Pharma Sales ( Cr) EPS ( ) PE(x) EV/E (x) RoNW (%) RoCE (%) Idirect Code ELDPHA CMP 370 FY10 720.9 26.2 14.1 10.3 9.9 10.3 Target 419 FY11 959.2 30.9 12.0 7.9 9.9 11.1 Mcap ( crore) 760.0 Upside (%) 13 FY12E 1301.1 46.7 7.9 6.0 13.2 14.5 FY13E 1488.9 59.9 6.2 5.4 14.7 15.9 Biocon Idirect Code BIOCON CMP 347 FY10 2367.8 14.7 23.7 15.5 16.7 15.6 Target 432 FY11 2770.5 18.4 18.9 11.5 18.1 19.3 Mcap ( crore) 7280.0 Upside (%) 24 FY12E 2230.3 19.3 18.0 10.6 16.5 18.7 FY13E 2670.4 24.0 14.5 8.5 17.6 20.9 IPCA Labs Idirect Code IPCLAB CMP 328 FY10 1559.6 16.4 19.2 13.4 23.7 20.5 Target 366 FY11 1881.1 20.3 15.5 11.3 23.6 19.5 Mcap ( crore) 4123.0 Upside (%) 12 FY12E 2177.1 22.2 14.2 9.2 21.1 22.0 FY13E 2572.9 29.5 10.7 7.0 22.4 24.1 Sun Pharma Idirect Code SUNPHA CMP 518 FY10 4019.8 13.0 39.7 38.3 17.7 19.2 Target 495 FY11 5721.4 17.5 29.5 26.3 19.2 22.6 Mcap ( crore) 53644.1 Upside (%) -4 FY12E 7110.7 18.7 27.8 23.1 18.0 20.5 FY13E 8306.7 22.5 23.0 19.2 18.4 21.7 Glenmark Idirect Code GLEPHA CMP 338 FY10 2500.7 12.2 27.6 17.6 14.1 14.8 Target 396 FY11 2949.1 16.9 20.0 18.5 22.5 16.7 Mcap ( crore) 9137.2 Upside (%) 17 FY12E 3605.0 25.5 13.3 10.5 26.4 24.3 FY13E 3967.3 23.3 14.5 10.9 20.3 21.3 Lupin Idirect Code LUPIN CMP 462 FY10 4870.8 15.3 29.7 22.1 27.2 22.5 Target 530 FY11 5832.0 19.3 23.4 18.2 26.8 22.2 Mcap ( crore) 20212.9 Upside (%) 15 FY12E 7052.3 23.6 19.2 14.5 25.8 24.2 FY13E 8313.4 27.9 16.3 11.7 24.5 25.8 Unichem Labs Idirect Code UNILAB CMP 145 FY10 747.4 13.6 10.6 7.7 21.9 24.4 Target 158 FY11 824.0 10.5 13.7 9.0 15.4 18.1 Mcap ( crore) 1.0 Upside (%) 9 FY12E 911.9 12.3 11.7 7.3 16.4 19.8 FY13E 1041.7 15.8 9.1 5.6 18.9 22.9 Indoco Remedies Idirect Code INDREM CMP 415 FY10 398.3 34.2 12.1 10.0 13.6 11.5 Target 468 FY11 478.5 41.6 10.0 8.0 14.6 12.4 Mcap ( crore) 510 Upside (%) 13 FY12E 561.1 44.9 9.2 6.4 14.1 14.4 FY13E 693.8 58.5 7.1 5.9 16.0 17.1 Opto Circuits Idirect Code OPTCIR CMP 287 FY10 1077.6 14.0 20.5 14.9 24.9 26.3 Target 309 FY11 1585.6 19.7 14.6 13.4 26.5 17.2 Mcap ( crore) 5349.7 % Upside 8% FY12E 2271.1 23.8 12.1 10.1 25.6 19.5 FY13E 2567.8 28.1 10.2 8.0 24.6 20.8 Cadila Healthcare Idirect Code CADHEA CMP 874 FY10 3686.8 24.7 35.4 24.8 37.0 25.8 Target 953 FY11 4630.2 34.7 25.2 20.5 38.7 28.5 Mcap ( crore) 17894.0 % Upside 9% FY12E 5320.5 40.5 21.6 17.0 34.3 28.7 FY13E 6553.4 52.9 16.5 12.6 34.7 33.3 Torrent Pharma Idirect Code TORPHA CMP 582 FY10 1904.0 27.3 21.3 5.9 31.2 29.1 Target 678 FY11 2204.9 31.9 18.2 4.8 29.2 22.1 Mcap ( crore) 4924.9 % Upside 16% FY12E 2631.0 43.8 13.3 3.5 30.5 26.5 FY13E 3128.6 52.1 11.2 2.8 27.8 27.3 ICICI Securities Ltd Retail Equity Research Page 4
ICICIdirect.com coverage universe (Pharma) Aurobindo Pharma Sales ( cr) EPS ( ) PE(x) EV/E (x) RoNW (%) RoCE (%) Idirect Code AURPHA CMP 157 FY10 3575.4 19.4 8.1 8.1 30.8 16.9 Target 233 FY11 Sub head one 4381.5 19.4 0.0 0.0 23.0 16.2 Mcap ( crore) 4571 % Upside 48% FY12E 5061.5 10.2 15.3 6.8 11.1 16.0 FY13E Sub head two 5809.7 25.9 6.1 5.2 22.6 20.4 Strides Arcolab Idirect Code STRARC CMP 310 Sub head three CY09 FP Header 1328.3 18.3 16.9 17.2 13.2 6.3 Target 426 CY10 1761.1 20.5 15.2 10.0 9.5 9.2 Mcap ( crore) 2190.0 % Upside 37% CY11E 2283.1 33.9 9.1 8.5 13.5 10.3 CY12E 2654.2 47.5 6.5 5.6 16.2 13.2 Exhibit 7: Recommendation Table Date Event CMP Target Price Rating 10-Jan-11 Q3FY11 Preview 389 432 BUY 24-Jan-11 Q3FY11 Result Update 368 432 BUY 8-Apr-11 Q4FY11 Preview 371 432 BUY 29-Apr-11 Q4FY11 Result Update 369 432 BUY 4-Jul-11 Q1FY12 Preview 364 432 BUY 22-Jul-11 Q1FY12 Result Update 361 432 BUY 5-Oct-11 Q2FY12 Preview 337 432 BUY Exhibit 8: Recommendation History 500 450 350 250 Nov-10 Dec-10 Jan-11 Mar-11 Apr-11 Jun-11 Jul-11 Sep-11 Oct-11 Price Target Price [ ICICI Securities Ltd Retail Equity Research Page 5
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Strong Buy: >15%/20% for large caps / midcaps, respectively; Buy: Between 10% and 15%/20% for large caps / midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1 st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 093 research@icicidirect.com ANALYST CERTIFICATION We /I, Siddhant Khandekar CA INTER Krishna Kiran Konduri MBA FINANCE research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. 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