Stock Review: BIOCON

Biocon had a muted June quarter. But the company's poised to grow strongly in the coming quarters and is a good buy for investors with a long-term view

 

Biotech major Biocon posted a lower than expected performance for the June quarter. Sale of its German subsidiary, low licensing income and turmoil in the Middle East impacted its performance. Net sales and operating profit each rose by 10% year-on-year.

BUSINESS

Biopharma segment, contributing 80% to Biocon's consolidated revenues, has been growing marginally since last three quarters raising concerns about the company's growth in the near term. However, Biocon's performance in the June quarter must be gauged as a short-term blip in a long-term growth story fuelled by its partnerships and research pipeline. The company has a strong portfolio of products that has enabled it to forge strategic partnerships. Biocon has tied up with Pfizer to commercialise its insulin portfolio. It has partnered with Mylan for monoclonal antibodies. These and many other such partnerships are also a source of development-linked licensing income for the company. The licensing income has been quite volatile in the recent quarters as it is linked to development and regulatory timelines. The company, having initiated several partnership discussions, expects this income to ramp up in the coming quarters.

GROWTH DRIVERS

The company is growing strongly in the insulin segment — outpacing the market and Novo Nordisk, the leading player in the domestic market. Biocon also plans to soon launch an insulin pen in the Indian market that is likely to help it increase its market share. The company is bullish on its expansion in the emerging markets that are logging an annual growth of 35-40%. It is particularly looking at developing the portfolio of biosimilar insulins for these markets. Its subsidiaries in the contract research services segment — Syngene and Clinigene — have logged strong performance for the quarter ended June, indicating a turnaround of the business. Innovative research is another important growth driver for the company. Biocon spends over 8% of net sales on research and has a strong product pipeline to justify such expenditure. The company is confident of this portfolio securing milestone payments from its research partners.

FINANCIALS

The company's net sales have grown at a compounded annual growth rate of 18% over the last five years. Its earnings have grown at a CAGR of 16% during the same period. Biocon's prospects look bright after the divestment of its low-margin German subsidiary. Operating margins have climbed back to the 27.5% level that is likely to be maintained ahead.

VALUATIONS

The company's growth this fiscal may not be comparable to the previous year due to the sale of the Axicorp business. Biocon's stock is trading at 20 times its last four quarters earnings. It has appreciated by 15% from a low of 318 in May 2011. It is a worthy buy for investors with a long-term perspective.

 

 

Stock Review: SUPREME infrastructure

 

Mid-sized infrastructure EPC contractor Supreme Infrastructure appears substantially undervalued considering its better than industry performance in terms of margins, return on equity and working capital cycle. Its growing order book and entry into BOT road projects give strong visibility about future growth. Long-term investors should add this scrip to their portfolio.

GROWTH DRIVERS

The company currently has orders worth 3,117 crore which is 3.4 times its sales for FY11. Nearly 85% of these unexecuted orders are for buildings and roads, while the rest consist of bridges, irrigation and power etc.

In the roads segment, Supreme Infra is a fully backward integrated company. It produces all the key raw materials such as asphalt and RMC, and has in-house stone quarrying and crushing capacities. This enables it to earn one ofthe best margins in the industry.

The company moved into Build-Operate-Transfer (BOT) road projects only a few years back, and has six such projects in hand today. The company is awaiting financial closure for three of them. For these it can sell equity at the special purpose vehicle (SPV) level to some international financial investors.

To expand geographical presence, the company recently opened a regional office in Kolkata.

Supreme Infra is also ramping up its project execution capacities. It acquired a 51% stake in Aurangabad-based Rudranee Infra, which specialises in water pipelines and power distribution projects. Supreme has also taken up a hospital construction project in Mumbai, and an industrial construction project for a steel plant in Jalna.

It plans to enter new segments like ports, power plants and tunneling.

FINANCIALS

In the last six years, the company's revenue has grown six-fold. In FY11, revenues grew 72% at 918.7 crore. EBIDTA for FY11 was up 65% at 156.5 crore. The bottom line grew 80% to 70.7 crore.

The company enjoys one of the highest margins, highest RoEs and the best working capital cycle among its peers.

VALUATION

The company is currently trading at 6.6 times its earnings for FY11. This is lower than its peers such as IRB Infra, Simplex Infra, Patel Engineering, IVRCL etc that trade at a P/E of between 7.8 and 13.8. In FY12, the company's net sales are expected to hit 1,300 crore with a net profit of 95 crore. Given this, the company is trading at an attractive one-year forward P/E of 4.9.

 

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