Buy Biocon Ltd For Target Rs.476 By JM Financial Services
Biocon announced the acquisition of the remaining 23.3% minority stake in Biocon Biologics (BBL), making it a wholly owned subsidiary. The transaction will be financed through the issuance of 171.3mn Biocon equity shares valued at USD 773mn and a cash outlay of USD 400mn. The implied valuation pegs BBL at USD 5.5bn equity value (~USD 6.6bn EV), broadly in line with expectations, and the merger is expected to eliminate the holding-company discount historically applied to BBL. In our understanding, this transaction could potentially add incremental ~10% on Biocon valuation due to removal of holdco discount as well as increased stake in BBL; yet to factored-in as further clarity is expected post the investor call. We remain constructive on Biocon’s outlook driven by biosimilar scale-up (five launches over FY25-27), complex generic launches (incl. GLP-1), margin expansion and improving leverage; we forecast FY25–28 revenue/EBITDA/PAT CAGR of 14%/23%/42% and retain our BUY rating with a TP of INR 476 (SOTP-based).
* Transaction overview: BBL (Biocon Biologics), a subsidiary of Biocon ltd, had minority shareholders of 23.3% which the parent company has approved to acquire. For this purpose, Biocon Ltd will issue equity shares on a preferential basis. Biocon Biologics Limited will now become a wholly owned subsidiary of Biocon Limited.
* Acquisition financing: Acquisition is to be funded through issuance of 171.3mn equity shares in Biocon Limited, amounting to USD 773mn, and cash consideration of USD 400mn.
* Parties involved: Biocon Ltd will acquire the remaining stake in BBL from Serum Institute Life Sciences (Serum), Tata Capital and Activ Pine through a share swap of 70.28 Biocon shares for every 100 Biocon Biologics shares, at a share price of INR 405.78 per Biocon share. Biocon will also acquire the residual stake held by Mylan for a total consideration of USD 815mn, of which USD 400mn will be payable in cash and USD 415mn through a share swap of 61.70 Biocon shares for every 100 Biocon Biologics shares at a share price of INR 405.78 per Biocon share
* Additional funding requirements: For the purpose of cash consideration payment, the company will be raising additional capital, of up to INR 45,000mn (USD 500mn) through QIP. The company will be issuing commercial Papers for an amount up to INR 18,000mn on private placement basis, in order to discharge the cash remittance to Mylan in the interim, till the completion of fund raise
* BBL valuation: The share swap values Biocon Biologics Limited at USD 5.5bn. Including the debt, BBL would stand at ~USD 6.6bn, in-line with our estimates. Going ahead, once the merger is completed, the discount factor that has been asscoiated with BBL will cease to exist at the combined level.
* Value unlock: We believe this transaction could potentially add incremental ~10% on Biocon valuation due to removal of holdco discount as well as increased stake in BBL. Though we await the investor call scheduled on Monday before officially updating our estimates
* Our view: We remain constructive on Biocon’s outlook driven by biosimilar scale-up (five launches over FY25-27), complex generic launches (incl. GLP-1), margin expansion and improving leverage. We estimate rev/EBITDA/PAT FY25-28 CAGR of 14%/23%/42%. The stock is currently trading at 14.4x/10.6x EV/EBITDA on FY27/FY28. We have a BUY rating on the name, valuing the company using SOTP methodology to arrive at a TP of INR 476.
Please refer disclaimer at https://www.jmfl.com/disclaimer
SEBI Registration Number is INM000010361
