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  • IC IC

    I S

    e c u r it

    ie s –

    R e t a il E

    q u it

    y R

    e s e a r c h

    R e s u lt

    U p d a t e

    CMP: | 295 Target: | 310 ( 5%) Target Period: 12 months

    Biocon Ltd (BIOCON)

    HOLD

    January 24, 2020

    Strong growth in biologics segment continues…

    Q3 revenues grew 13.5% YoY to | 1748.1 crore (I-direct estimate: | 1774.4

    crore) mainly due to 31% YoY growth in biologics to | 588 crore (I-direct

    estimate: | 561.3 crore). EBITDA margins grew 70 bps YoY to 25.4% (I-direct

    estimate: 25.1%). Improvement in gross margins and other expenditure was

    largely offset by higher R&D cost and employee cost. EBITDA grew 16.7%

    YoY to | 444.2 crore against I-direct estimate of | 446.0 crore. Adjusted net

    profit declined 4.5% to | 202.8 crore (I-direct estimate: | 211.1 crore). Delta

    vis-à-vis EBITDA was due to higher tax rate.

    Well placed to capture global biosimilar opportunities

    The biologics segment (28% of FY19 revenues) includes biosimilars and

    insulin. The company is heavily spending in this space. The progress has

    been encouraging with approvals and launches in the US, EU, Japan,

    Australia, and Emerging Markets. Post the Mylan Upjohn (Pfizer) merger, the

    scope has been extended to China as well. We expect biologics to grow at

    ~57% CAGR to | 5813 crore in FY19-22E mainly due to strong US pipeline

    [Pegfilgrastim (launched), Trastuzumab (launched), Glargine (expected by

    the end of FY21E, Aspart (expected in FY22E) and Bevacizumab (expected

    in FY22E)], besides launches across the globe.

    Research services (Syngene) to maintain growth momentum

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

    33% of total revenues. The company caters to 331 clients including eight out

    of global top 10 global players. We expect revenues to grow at a CAGR of

    ~15% to | 2745 crore in FY19-22E.

    Small molecules growth steady

    Small molecules (32% of FY19 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. We expect small molecules segment to grow at

    a CAGR ~14% CAGR to | 2607 crore in FY19-22E.

    Valuation & Outlook

    Backed by a strong pipeline (28 products under development) and expected

    new launches, we expect biologics growth momentum to sustain. The

    management is confident of achieving US$1 billion biological revenues by

    end of FY22. With better visibility, the company has optically accelerated the

    scalability capex and R&D, which is likely to push related expenses higher in

    the near term. Timely launches and ramp up of biosimilars in the developed

    as well as EMs and Syngene’s performances remain key levers for the

    company. That said, concerns about lower-than-expected PE valuation in

    biologics and holding company discount are likely to weigh in the near term.

    On an SoTP basis, we maintain target price of | 310 per share.

    Key Financial Summary

    (Year End March) FY19 FY20E FY21E FY22E CAGR (FY19-22E) %

    Revenues (| crore) 5514.4 6777.5 9024.4 11910.2 29.3

    EBITDA (| crore) 1361.2 1846.8 2551.9 3524.8 37.3

    EBITDA margins (%) 24.7 27.2 28.3 29.6

    Net Profit (| crore) 744.8 904.5 1237.4 1881.3 36.2

    EPS (|) 6.2 7.5 10.3 15.7

    P/E (x) 39.1 25.9 28.6 18.8

    RoCE (%) 10.9 12.9 15.1 19.4

    RoE (x) 26.4 19.7 14.4 10.3

    Particulars

    Particular

    Market Capitalisation

    Debt (FY19)

    Cash (FY19)

    EV

    52 week H/L 341/211

    Equity capital (|Crore)

    Face value (|) | 5

    | 600 crore

    | 36736 crore

    Amount

    | 35370 crore

    | 2423 crore

    | 1057 crore

    Key Highlights

     Strong growth in Biologics segment and improvement in product mix

    drives Q3.

     Backed on the strong product pipeline and expected new launches,

    biologics segment remained as a key

    driver for the stock.

     That said, concerns about lower than expected PE valuation in Biologics

    and holding company discount is

    likely to weigh in the near term.

     Downgrade from BUY to HOLD

    Research Analyst

    Siddhant Khandekar

    siddhant.khandekar@icicisecurities.com

    Mitesh Shah, CFA

    mitesh.sha@icicisecurities.com

    Sudarshan Agarwal

    sudarshan.agarwal@icicisecurities.com

  • ICICI Securities | Retail Research 2

    ICICI Direct Research

    Result Update | Biocon Ltd

    Exhibit 1: Variance Analysis

    Q3FY20 Q3FY20E Q3FY19 Q2FY20 YoY (%) QoQ (%) Comments

    Revenue 1,748.1 1,774.4 1,540.8 1,572.2 13.5 11.2 YoY growth mainly driven by strong 31% growth in biologics segment

    Raw Material cost 577.3 554.9 528.1 477.9 9.3 20.8 YoY improvement mainly due to better product mix

    Employee cost 376.1 363.8 294.4 353.3 27.8 6.5

    R & D Expenditure 131.0 109.6 77.0 104.0 70.1 26.0 R&D spend increase across all segments. Gross R&D spend was | 155

    crore in Q3FY20

    Other Expenditures 219.5 300.1 260.6 234.2 -15.8 -6.3

    Total Expenditure 1,303.9 1,328.4 1,160.1 1,169.4 12.4 11.5

    EBITDA 444.2 446.0 380.7 402.8 16.7 10.3

    EBITDA (%) 25.4 25.1 24.7 25.6 70 bps -21 bps Improvement in gross margins largely offset by increase in R&D and

    employee cost

    Interest 17.7 13.8 18.6 13.8 -4.8 28.3

    Depreciation 144.0 131.6 116.7 131.6 23.4 9.4

    Other income 35.8 28.4 25.6 38.4 39.8 -6.8

    EO 0.0 0.0 -5.8 -67.5 0.0 0.0

    PBT 318.3 329.0 276.8 363.3 15.0 -12.4

    Tax 84.8 75.7 46.1 100.1 83.9 -15.3

    MI 27.5 32.9 26.0 38.1 5.8 -27.8

    Adj. PAT 202.8 211.1 212.4 189.0 -4.5 7.3 Delta vis-à-vis EBITDA was mainly due to higher depreciation and tax

    rate

    Key Metrics

    Small Molecules 535.0 531.3 462.0 522.6 15.8 2.4 YoY growth led to strong performance of generic formulations and APIs

    businesses. FDF sales were at | 100 crore

    Biologics 588.0 561.3 449.0 516.1 31.0 13.9 YoY growth led by higher traction in sales of key biosimilars in

    developed and emerging markets

    Branded Formulations 157.0 137.8 212.0 128.3 -25.9 22.4 YoY decline mainly due to pricing pressure and other headwinds, which

    continued to weigh on both India and UAE businesses

    Contract Research 519.0 537.1 467.0 464.6 11.1 11.7

    YoY growth mainly due to strong growth in discovery services

    business, combined with consistent performances in dedicated R&D

    centres and development services business

    Licensing income 9.0 7.0 7.0 7.0 28.6 28.6

    Source: ICICI Direct Research

    Exhibit 2: Change in Estimates

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

    Revenues 6,718.1 6,777.5 0.9 8,796.0 9,024.4 2.6

    EBITDA 1,855.3 1,846.8 -0.5 2,451.1 2,551.9 4.1

    EBITDA Margin (%) 27.6 27.2 -35 bps 27.9 28.3 38 bps

    Net Profit 906.1 904.5 -0.2 1,272.0 1,237.4 -2.7

    EPS (|) 7.6 7.5 -0.8 10.6 10.3 -2.7

    FY20E FY21E

    Source: ICICI Direct Research

    Exhibit 3: Change in Estimates

    Comments

    Growth (%) FY18 FY19 FY20E FY21E FY20E FY21E

    Small Molecules 1,484.9 1,749.0 2,065.4 2,327.4 2,047.7 2,293.4

    Biologics 770.2 1,517.0 2,270.6 3,633.0 2,153.7 3,445.8 Changed mainly due to better-than-expected growth in 9MFY20

    Branded Formulations 611.5 656.0 577.9 655.5 532.1 574.7 Changed mainly due to better-than-expected growth in Q3FY20

    Contract Research 1,423.1 1,826.0 2,016.0 2,373.4 2,081.2 2,451.3

    EarlierCurrent

    Source: ICICI Direct Research

  • ICICI Securities | Retail Research 3

    ICICI Direct Research

    Result Update | Biocon Ltd

    Conference Call Highlights

     Increase in gross R&D expenses to | 155 crore was mainly

    attributable to biosimilar developments, novel molecules R&D and

    ANDA filings. Net R&D was | 131 crore

     Growth in small molecules segment was attributable to growth in

    immunosuppressant demand, APIs and generic formulations

    crossing | 100 crore in revenues. Currently, three molecules have

    been commercialised in the US

     During the quarter, Biocon Biosphere was incorporated. The Vizag

    facility will be set up under this entity to benefit from a lower tax rate

    of 15% applicable to manufacturing facilities set up after October

    2019

     The company is looking for additional funding of US$200-300 million

    for future capex through private equity

     As per management, Biocon biologics will be publicly listed (IPO)

    within the next three years

     R&D is on an upward trajectory. For FY20, R&D is expected to remain

    between 12% and 15% of sales ex-Syngene

     Capex for 9MFY20 was | 1500 crore. The management has guided

    for capex for FY20, FY21 at ~| 2000 crore

     The company expects to maintain its single digit filings annual run

    rate in the US

     The company has reiterated its target of achieving US$1 billion of

    biologics sales by FY22

     The managemen

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