Buy Biocon Ltd for the Target Rs 520 by Motilal Oswal Financial Services Ltd
Biosimilars/generics growth offsets weak research services Broad-based efforts to scale each business segment
* Biocon (BIOS) delivered in-line revenue for the quarter, with EBITDA/PAT lower than expected (16%/28% miss). Biosimilars and generics led robust revenue growth, while Syngene (CRDMO) dragged overall performance in 1QFY27 due to lower offtake from certain key customers.
* The biosimilars business has witnessed consistent traction over the past two years. Specifically in 1QFY27, growth was led by increased sales in the NA market and new launches. Further expansion of manufacturing capacity is expected to sustain the growth momentum.
* The profitability of generics segment is gradually improving with increased sales (driven by Liraglutide in multiple markets) and cost efficiency initiatives.
* We cut our earnings estimate by 12%/3% for FY27/FY28, factoring in:
a) weak outlook for the research services segment and efforts underway to increase commercial execution
b) optimizing R&D spend. We value BIOS on an SOTP basis (22x EVEBITDA for biosimilar business, 10x EV/EBITDA for generics business, and 15% hold-co discount to Syngene shareholding) to arrive at a TP of INR520.
* We expect improved outlook for the biosimilars and generics segments over the near-to-medium term, led by product launches and better utilization of manufacturing capacities. While the research services segment is expected to require some gestation period before witnessing a revival in financial performance, management is focused on increasing the scope of business through new customer additions and increasing business from existing customers. Reiterate BUY.
Product mix benefit outweighed by lower operating leverage
* BIOS 1QFY27 revenue grew 10% YoY to INR43.4b (est. INR45.9b).
* Gross margin (GM) expanded 150bp YoY to 63.1%.
* EBITDA margin was stable at 19.5% (est: 21.9%); other expenses rose 90bp YoY as % of sales. R&D costs inched up (30bp YoY as % of sales) in 1Q.
* EBITDA grew 10.7% YoY to INR8.5b (est: INR10b).
* BIOS had an exceptional expense of INR130m related to the termination benefits extended to employees.
* Adj. for the same, PAT came in at INR1.5b, up 3.9x YoY due to tax benefit received during the quarter.
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