Buy Biocon Ltd for the Target Rs. 410 by Motilal Oswal Financial Services Ltd
Temporary headwinds in generics weigh on 1Q
Biologics and Syngene continue to build strategic strengths
* Biocon (BIOS) reported lower-than-expected financial performance in 1QFY26, affected mainly by a sharp reduction in generics sales and increased opex related to new facilities.
* While it was a dismal quarter for the generics segment, BIOS has a pipeline of product approval/launches lined up for the near to medium term to improve growth prospects and profitability.
* Biologics sales witnessed improved traction from commercialized molecules in both advanced as well as emerging markets.
* In fact, the profitability also remained steady in the biologics segment (21% EBITDA margin in 1QFY26), driven by higher volume off-take and better operating leverage.
* BIOS also has a launch pipeline in the biologics segment (insulin Aspart in particular) to sustain growth momentum in this segment.
* BIOS’ subsidiary, Syngene, delivered steady growth on a low base of past year. It continues to expand niche platform service offerings in research services and scale up manufacturing capabilities in small/large molecules.
* We reduce our earnings estimates by 7%/3% for FY26/FY27, factoring in a) near-term cost pressures in generics, b) lower operating leverage, and c) higher depreciation related to facilities coming online in Syngene. We value BIOS on an SOTP basis (20x 12M forward EV/EBITDA for 73% stake in Biocon Biologics, 53% stake in Syngene, and 10x EV/EBITDA for the Generics business) to arrive at a TP of INR410.
* BIOS is building growth levers across generics, biologics and Syngene. The product pipeline remains encouraging for generics/biologics. Investment in manufacturing to support commercial traction for launches/potential approval is largely in place in generics/biologics. Considering the market demand dynamics, Syngene is expanding its capabilities in CDMO space. Maintain BUY.
Biologics drive revenue growth; margins miss estimates in 1QFY26
* BIOS 1QFY26 revenues grew 15% YoY to INR39.4b (est. INR42.4b).
* Revenue growth was led by Biosimilars (61% of sales), up 28.6% YoY to INR24.5b. Research services (22% of sales) grew 11% YoY to INR8.8b. Generics sales rose 5.7% YoY to INR7b (17% of sales).
* Gross margin (GM) contracted 120bp YoY to 63.5%.
* EBITDA margin expanded 90bp YoY to 19% (est: 21.5%) due to lower R&D/employee expenses (-140bp/-60bp YoY as a % of sales).
* EBITDA margin for Biocon Biologics was 20.8% for 1QFY26 (down 200bp YoY/down 110bp QoQ).
* EBITDA margin of Syngene was 25.6% for the quarter (up 410bp YoY/ down 810bp QoQ basis).
* Generic business EBITDA margin was 1.9% vs. 8.9% YoY and 23.2% QoQ.
* EBITDA grew 20.5% YoY to INR7.5b (est: INR9b) for the quarter.
* Adj. PAT came in at INR300m vs. loss of INR1.6b YoY.
Highlights from the management commentary
* While generics business was subdued for the quarter, BIOS has a line-up of product launches, which would improve profitability of generics going forward. Specifically, Liraglutide in EU, g-Entresto, and Micafungin everolimus in the US would drive near-term sales.
* BIOS awaits approval for Liraglutide in the US market. Insulin Aspart would be launched soon in the US market.
* With respect to RH-Insulin, BIOS has expanded its drug product capacity in Malaysia to cater to certain markets after regulatory approval.
* About 77% of biologics business comes from advanced markets and the remaining from emerging markets.
* There has been a small component of g-Revlimid in 1QFY26 sales for BIOS
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