Biocon: Q4 comprehensively ahead of estimates

Analysts say positives priced in; efforts translating into higher growth crucial for further upgrades

Biocon’s operational performance for the quarter ended March beat Street expectations and saw the stock rise 2.25 per cent to close at Rs 453. The earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 202 crore was way ahead of the Bloomberg consensus estimate of Rs 171 crore. Margins at 24 per cent, while higher than 23.5 per cent in the year-ago quarter, were encouraging, given that the sub-20 per cent margins in the December 2014 quarter had disappointed the Street and led to pressure on the stock.

For the March quarter, sales at Rs 854 crore (up 14.8 per cent year-on-year) also came well above the Bloomberg consensus expectation of Rs 791 crore. At the net level, reported profit at Rs 201 crore came higher than Rs 113 crore in the March 2014 quarter, largely helped by profit from sale of Syngene shares. However,  even after adjusting for the one-time income, it would have been Rs 106 crore, higher than the Bloomberg estimate of Rs 97 crore.

The improvement in margins was on account of a better product mix and field force rationalisation. The biopharma business contributed Rs 493 crore in the quarter, growing 12 per cent y-o-y and contributed 59 per cent to overall revenue. Biocon continues efforts to diversify into other regions, which should help offset the weaker traction in West Asia. It is also taking measures to address issues like reduced offtake of APIs and capacity constraints in insulin. In this backdrop, full-year revenues at Rs 1,807 crore grew three per cent y-o-y.

Positively, Biocon’s Malaysia-based insulin plant has been commissioned, though it will take some time for various regulatory approvals before commercial supplies can be started.

In the quarter, branded formulation revenues grew only six per cent to Rs 98 crore, and lower than full-year growth of 10 per cent. However, that’s largely due to Biocon’s focus on improving of profitability, compared to revenues. It has been shedding smaller products to focus on key brands. After full-year successful sales of Canmab (trastuzumab), an oncology product, Biocon plans launching more bio-similar products in India. To grow its insulin glargaine business, Biocon plans on entering the disposable devices segment. The company is bringing speciality focus into its business, which should result in better profitability in the long run.

In the research services business, Biocon’s plan to bring at least five molecules to trial-3 stage by the end of the year is crucial, as it holds immense potential. Its research subsidiary, Syngene, delivered 27 per cent growth in revenue to Rs 238 crore, its highest quarterly performance. For FY15, Syngene's sales at Rs 823 crore grew 15%. Plans of listing this subsidiary through an IPO should help unlock value in the business.

While all this bodes well, analysts as those at Motilal Oswal Securities say the stock factors in separate listing of Syngene and out-licensing of research molecules. Further gains for the stock would depend on the company's efforts translating in higher growth. Hitesh Mahida at Antique Stock Broking also has 'Hold' ratings as consensus target price as per Bloomberg stands at Rs 459.