Biocon-BBL merger positioned to add value, says Nuvama; retains 'Buy' call

Analysts at Nuvama Institutional Equities remain bullish on pharmaceutical major Biocon, reiterating their ‘Buy’ rating on the counter. The optimism stems from the company’s plan to increase its stake in Biocon Biologics (BBL), the expected consolidation of the Biologics arm, and improving fundamentals.

 

“We are building in 15 per cent and 19 per cent overall revenue and Ebitda CAGR over FY25 to FY28E, while RoCE (ex-goodwill) shall improve from 4 per cent in FY25 to 9 per cent. Retain Buy with an unchanged SoTP-based target price of ₹480,” the brokerage said in a note.

Building stake in BBL; boosting value

Biocon has announced plans to acquire the remaining 23.3 per cent minority stake in BBL through a mix of about 400 million dollars in cash to Viatris and a 773 million dollar share swap with Viatris and other investors.

 

Nuvama analysts Aashita Jain, Shrikant Akolkar and Tanay Parab said the merger should unlock value for shareholders by eliminating the holding-company discount and enabling operational synergies through fungible facilities.

 

“Although the share swap shall lead to around 280 million incremental shares, which translates into a 17 per cent stake for BBL minority investors at 10 per cent and QIP participants at around 7 per cent, Biocon would consolidate 100 per cent of BBL’s economics. We maintain a neutral stance on the deal and retain Buy amid improving fundamentals with an unchanged target price of ₹480. At the current market price, it trades at 13 times FY27E EV to Ebitda,” they noted.

Biocon to consolidate Biologics arms; eyes $500mn QIP

The brokerage said Biocon intends to acquire the entire 23.3 per cent minority stake in BBL from Viatris, Serum Institute, True North and Tata Capital. The 1.17 billion dollar consideration comprises about 400 million dollars in cash to Viatris and a share swap of about 773 million dollars with other minority holders. The cash payout will initially be funded through CPs and later refinanced through a proposed QIP of up to 500 million dollars, subject to shareholder approval.

 

“The share swap, benchmarked at ₹405 per share, entails issuance of 171 million Biocon shares, which implies 10.5 per cent dilution, and values Biocon Biologics at 5.5 billion dollars, broadly in line with our expectation,” the brokerage said.

Merger eliminates holdco discount; catalysing value creation

According to the analysts, consolidating BBL marks a positive step as it eliminates the holding-company discount, simplifies the corporate structure and may strengthen credit metrics. Management expects operational synergies across supply chain, procurement, manufacturing and infrastructure including fermentation and injectable capabilities, although these are yet to materialise.

 

“With the swap ratio valuing BBL at 5.5 billion dollars, the combined transaction including the QIP could lead to around 280 million incremental Biocon shares. This may introduce excess liquidity in the near term with a six-month lock-in, but Biocon will capture 100 per cent of BBL’s economics. Our preliminary estimates suggest no major changes in EPS or SoTP, while synergies, if unlocked, could drive accretion,” they said.

Improving fundamentals to be key; recovery evident

While the transaction may create volatility until March 2026, Nuvama believes fundamentals will take charge thereafter. The analysts highlighted improving business prospects supported by stronger biosimilar traction with Stelara at around 15 per cent share, expected uptake of bAspart and denosumab, new launches, better operating leverage in GLP-1 and generics, and new CRDMO contracts as factors likely to support a recovery from FY27.

 

“Moreover, after structured debt reduction, net debt to Ebitda shall be 2.5 times compared with 4.5 times in FY23 and improve further,” they added. 

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