Biocon: Multiple triggers

Proposed listing of subsidiary Syngene and commissioning of Malaysian unit are positives

Through the past two days, Biocon has risen 10 per cent on reports the company will hit the capital market in the next two months to raise funds for its unlisted custom research and development subsidiary, Syngene.

Biocon, which holds 85.5 per cent stake in Syngene, is expected to offload up to 15 per cent in the unlisted subsidiary through an initial public offering. Analysts say a successful listing will fetch Rs 700-800 crore, with which the company can partly reduce debt and invest in Syngene’s new facility.

Recently, Syngene acquired land at the Mangalore special economic zone to set up facilities to manufacture novel APIs (active pharma ingredients), advanced intermediates and agrochemicals for clients. Given the high margins, the strong revenue growth for the business and long-term contracts, the decision to add agrochemicals to its pharma outsourcing basket is seen as positive.

In 2012, GE Capital had bought 7.69 per cent stake in Syngene for Rs 125 crore, valuing it at Rs 1,625 crore. Later, Biocon had bought back the stake from GE for Rs 215 crore, valuing it at Rs 2,795 crore. Last year, it sold 10 per cent stake in Syngene to India Value Fund for Rs 380 crore, valuing Syngene at Rs 3,800 crore.

Biocon has been considering listing Syngene for a couple of years but this has been postponed due to market volatility. On Wednesday, Biocon Chairman and Managing Director Kiran Mazumdar-Shaw said the company was looking at a higher valuation when Syngene would be listed.

Another trigger is the monetisation of Biocon’s Malaysian facility, where it has invested $200 million. The plant, said to be Asia’s largest integrated insulin manufacturing facility, has been commissioned and should start production once all trials and product stability tests are completed (possibly in three-four quarters).

For Biocon, the long-term trigger is the launch of its generic insulins, including rh-insulin and Glargine (both in phase-III trials) in regulated markets. Given the upfront investment in manufacturing facilities and research programmes and the muted growth in the biopharma segment, the stock has underperformed its peers, though that could change.

At the current price of Rs 466, the stock is being traded at 17 times its FY17 estimate. Investors could consider it on dips, with a two-three-year horizon.