August 14, 2013

Biocon Limited.

Focused on innovation

CMP Rs 344 Target Rs 405 Follow up Coverage - Buy

SKP Securities Ltd www.skpmoneywise.com Page 1 of 7

z

Face Value (Rs.) 5

Equity Capital (Rs.Cr) 100.0

M. Cap (Rs. Cr.) 6,880

52‐wk High / Low (Rs.) 352/240

Avg.Volume (qtrly) 63424

BSE code 532523

NSE code BIOCON

Bloomberg code BIOS:IN

Key Share Data

Shareholding Pattern (as on June 30,2013)

61%

10%

8%21%

Promoters

FII

DII

Others

Source: Company data, BSE

Particulars FY12 FY13 FY14E FY15ENet Sales 2049 2426 2900 3446

growth (%) 18% 20% 19%

EBIDTA 517 543 620 714

PAT 338 311 326 365

growth (%) ‐8% 5% 12%

EPS (Rs.) 17 25 16 18

BVPS (Rs.) 114 135 142 152

Key Ratios FY12 FY13 FY14E FY15E

P/E (x) 20.3 13.5 21.1 18.8

P/BVPS (x) 3.0 2.6 2.4 2.3

M.Cap/Sales (x) 3.4 2.8 2.4 2.0

EV/EBIDTA (x) 11.3 10.6 9.8 8.3

ROCE (%) 15% 18% 10% 11%

ROE(%) 16% 13% 12% 12%

EBIDTA Mar. (%) 25% 22% 21% 21%

PAT Mar. (%) 17% 13% 11% 11%

Financials (Rs In Cr.)

Price Performance Biocon vs CNXPHARMA

‐25%

75%

175%

Mar‐1

0

Jul‐10

Nov‐1

0

Mar‐1

1

Jul‐11

Nov‐1

1

Mar‐1

2

Jul‐12

Nov‐1

2

Mar‐1

3

Jul‐13

Biocon CNXPHARMA

Analyst: Rupali Goregaonkar Singh

Tel No.:+91 22 4922 6006; Mob: +919820501348Email: rupali.goregaonkar@skpmoneywise.com

Company ProfileBiocon India Ltd. was incorporated in 1978. It is the first Indian manufacturer and exporter of ENZYMES to U.S. & Europe. Biocon subsequently entered into biopharmaceuticals, statins and then moved to insulin where it is the first company worldwide to develop human insulin on a Pichia expression system and also it is one of the Asia’s largest insulin producers, having 12% of market share. Further, Biocon has paved its way in developing Novel molecules.

Future outlook Development programs of ANDAs, Upcoming facility in Malaysia and Alliances with Mylan will accelerate revenue growth. The small molecules portfolio has delivered a strong performance in

Q1FY14, led by Immunosuppresants and specialty molecules like Fidaxomicin and Orlistat. With the change in market demand, the Statin portfolio has remained stable.

Biocon is now seeking to develop 20 ANDAs filings by FY15 in the USA which will be focusing on key therapeutics like Oncology, Diabetology, Cardiology, Dermatology, Ophathalmology and Inflammatory.

Recently Biocon underwent a capacity enhancement in an Insulin manufacturing plant at Bangalore. With this it aims to bridge the demand gap and sustain the growth momentum going ahead.

To meet increasing demand from emerging market of Diabetic patients for affordable insulin and insulin analogs, Biocon is setting up its first overseas bio‐ pharma manufacturing and research facility in Malaysia. It is expected to complete the 1st Phase by FY2015.

In the Biosimilars segment, it has reported a healthy growth in Q1FY14 where it has also enhanced their geographical footprint in generic rh‐insulin to more than 45 countries.

Biocon – Mylan initial strategic partnership has given an opportunity to the company to explore in Biosimilar MAbs & other biologics (Global Market size: USD34 billion). Further, extension of this partnership will share a significant part of the development cost of Generic Insulin Analogs (Global market size: USD14 billion) in both US and Europe.These phases of collaboration will strengthen Biocon’s R&D and manufacturing prowess of biologic with Mylan’s regulatory and commercialization capabilities in the US, Europe and other markets.

In one of the Biosimilar Mabs segment, Trastuzumab, the company has completed patient recruitment for India Phase III trial and is in the process of filing & approval with the DCGI in 2014. Herceptin is used for metastatic breast cancer which is expected to lose patent protection in the EU in 2014 & in the US in 2017. With this we expect it to expand the market size further to USD 2 billion by 2016 & USD 4 billion by 2019.

Biocon Limited.

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Branded formulation is expected to grow by CAGR 17.8% over FY13‐15E.

The Branded formulation portfolio has delivered a good performance in Q1FY14. Although there are challenges in the industry due to recent changes in pricing guidelines. We expect that Biocon will continue to grow by CAGR 17.8% over FY13‐15E on the back of sustainable momentum in Oncology, Diabetology & Nephrology and support by new divisions of comprehensive care and Bio products.

Spreading its wings through partnership will boost Novel molecule pipeline:

Biocon has entered into an agreement with Bristol Myers Squibb (BMS) for development, regulatory and commercialization of Novel molecules IN‐105, a Prandial oral insulin product. Under the terms of the agreement, BMS will have an exclusive option post phase II to further develop & commercialize the product worldwide. In return, Biocon will be receiving the license fee in addition to potential regulatory & commercial milestone payments and royalties on commercial sales of IN‐105 outside India.

The company has received marketing authorization from the DCGI for its second Novel molecule Itolizumab which is used for the treatment of Psoriasis. Psoriasis is an incurable disease and a socially debilitating disease affecting 2% to 3% of the world population. The Global estimates that the treatment of psoriasis will have a market value of USD 8 billion by 2016. We expect that Biocon will commercially launch brand Alzumab™ in India by FY14.

These successful Novel molecules will further pave way for Biocon to extend its pre‐clinical and clinical development of other diseases like Rheumatoid Arthritis, Multiple Sclerosis, Oncology and Vitiligo.

Topline to grow at CAGR 17% and maintain EBITDA margins between FY13‐15E

We expect the net sales to grow at the 17% CAGR over FY13‐15E to Rs. 3446 cr. on the back of launch of Biosimilar & Novel molecules and sustainable growth in Branded formulations business. We expect company to deliver an EBITDA margins around 21‐22% during FY14‐15E.

Outlook & Recommendation:

We expect Biocon to report a healthy growth in topline on the basis of continuously spending on R&D segment and focusing on innovation to meet the increasing demand of affordable drugs in the market.

On an EV/EBITDA basis, Biocon is trading at 10.6x, 9.8x and 8.3x its FY13, FY14E and FY15E EBITDA of Rs.543 cr., Rs.620 cr. and Rs.714 cr. respectively.

Biocon trade at a PE of 13.5x, 21x and 18.8x in FY13, FY14E and FY15E earning of Rs.25, Rs.16 and Rs.18 respectively.

We recommend Buy rating on the stock with the 12 month target price of Rs. 405 per share, implying an upside of ~18% from current levels. We have arrived at the target by assigning to EV/EBITDA 10x of FY15E.

Biocon Limited.

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Quarterly Results Performance

Particulars Q1FY14 Q1FY13 % Change Q4FY13 % Change FY13 FY12 % ChangeNet Operating Income 700.69 576.68 21.5% 637.08 10.0% 2485.30 2086.50 19.1%Expenditure(Inc)/Dec in stock 10.57 (7.92) ‐233.5% (15.84) ‐166.7% (26.50) (44.50) ‐40.4%

as % of sales 1.5% ‐1.4% ‐2.5% ‐1.1% ‐2.1%Raw materials 269.82 228.6 18.1% 273.17 ‐1.2% 1001.90 819.00 22.3%

as % of sales 38.5% 39.6% 42.9% 40.3% 39.3%Purchase of Traded Goods 23.27 21.6 7.8% 18.75 24.1% 69.30 77.00 ‐10.0%

as % of sales 3.3% 3.7% 2.9% 2.8% 3.7%Employees Expenses 115.30 91.3 26.3% 109.01 5.8% 389.40 307.60 26.6%

as % of sales 16.5% 15.8% 17.1% 15.7% 14.7%Other Expenses 129.69 120.5 7.6% 139.88 ‐7.3% 508.20 410.10 23.9%

as % of sales 18.5% 20.9% 22.0% 20.4% 19.7%Total Expenditure 548.65 453.98 20.9% 524.97 4.5% 1942.30 1569.20 23.8%

as % of sales 78.3% 78.7% 82.4% 78.2% 75.2%EBIDTA 152.04 122.70 23.9% 112.11 35.6% 543.00 517.30 5.0%

Ebidta Margin % 21.7% 21.3% 40bps 17.6% 410bps 21.8% 24.8% 300bpsDepreciation 48.25 42.7 13.0% 45.87 5.2% 179.30 174.40 2.8%EBIT 103.79 80.01 29.7% 66.24 56.7% 363.70 342.90 6.1%

Ebit Margin % 14.8% 13.9% 90bps 10.4% 440bps 14.6% 16.4% 180bpsOther Income 22.48 15.92 ‐‐ 11.85 89.7% 52.70 61.80 ‐14.7%EBIT after other Income 126.27 95.93 31.6% 78.09 61.7% 416.40 404.70 2.9%Interest 0.38 3.2 ‐88.2% 0.95 ‐60.0% 8.10 12.20 ‐33.6%PBT before Exceptional 125.89 92.72 35.8% 77.14 63.2% 408.30 392.50 4.0%Exceptional Income 0.00 0.00 ‐‐ 201.91 ‐‐ 201.90 ‐‐PBT after Exceptional 125.89 92.72 35.8% 279.05 ‐54.9% 610.20 392.50 55.5%Income Tax 29.71 13.73 116.4% 28.14 5.6% 97.50 54.10 80.2%Minority Interest 2.68 0.19 2.3 (3.80) Net Profit After Tax 93.50 78.80 18.7% 248.61 ‐62.4% 508.90 338.40 50.4%

PAT Margin % 13.3% 13.7% (40bps) 39.0% 20.5% 16.2% 430bpsEPS 4.68 3.94 18.7% 12.43 ‐62.4% 25.45 16.92 50.4%EPS excl. Exceptional income 4.68 3.94 18.7% 2.34 100.2% 15.35 16.92 ‐9.3%

Source: Company & SKP Research

Biocon Limited.

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Financial outlook: Revenue‐ Seen healthy revenue growth Increase in R&D spending will boost revenue

growth

2,36

8

1,79

0

2,04

9

2,42

6

2,90

0

3,44

6

‐24%

14%18% 20% 19%

‐30%

‐20%

‐10%

0%

10%

20%

30%

‐

1,000

2,000

3,000

4,000

FY 10 FY 11 FY 12 FY 13FY 14EFY 15ERevenue Revenue growth (%)

Sale

s‐R

s. in

cro

res

8%6% 6%

5%4%

7%

0%

2%

4%

6%

8%

0

50

100

150

200

FY07 FY08 FY09 FY10 FY11 FY12 FY13

Revenue R&D Capital R&D

R&D % to NS

R&

D s

pend

ing

Rs.

in c

rore

s

Source: Company & SKP Research Source: Company & SKP Research Margins – To remain stable over FY14E & FY15E

436

522

517

543

620

714

18%

29%25%

22% 21% 21%

0%

10%

20%

30%

40%

‐

200

400

600

800

FY 10 FY 11 FY 12 FY 13 FY 14E

FY 15E

EBITDA EBITDA margins

EBIT

DA

‐R

s. in

cro

res

269

340

338

311

326

365

11%

19%17%

13% 11% 11%

0%

5%

10%

15%

20%

‐

100

200

300

400

FY 10 FY 11 FY 12 FY 13 FY 14E

FY 15E

Net profit Margins

Net

pro

fit ‐

Rs.

in c

r.

Source: Company & SKP Research Source: Company & SKP Research In spite of capex D/E ratio remain in the comfort zone Paying consistent dividend policy

51

4

66

70

16

4

40

6 48

3

0.29

0.03 0.03

0.06

0.14 0.16

‐

0.05

0.10

0.15

0.20

0.25

0.30

0.35

‐

100

200

300

400

500

600

FY 10 FY 11 FY 12 FY 13 FY 14E FY 15EDebt Debt/Equity ratio

4.50 5.00 7.50 7.50 7.50

26% 30%

49%46%

41%

0%

10%

20%

30%

40%

50%

60%

‐

2.00

4.00

6.00

8.00

FY 11 FY 12 FY 13 FY 14E FY 15E

DPS Dividend payout ratio

Source: Company & SKP Research Source: Company & SKP Research

Biocon Limited.

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Valuations: We expect Biocon to report healthy growth in topline on the basis of continuously spending on R&D

segment and focusing on innovation to meet the increasing demand of affordable drugs in the market.

On an EV/EBITDA basis, Biocon is trading at 10.6x, 9.8x and 8.3x its FY13, FY14E and FY15E EBITDA of Rs.543 cr., Rs.620 cr. and Rs.714 cr. respectively.

Biocon trade at a PE of 13.5x, 21x and 18.8x in FY13, FY14E and FY15E earning of Rs.25, Rs.16 and Rs.18 respectively.

One year forward EV/EBITDA Band

3,000

4,000

5,000

6,000

7,000

8,000

Apr‐1

0

Aug‐

10

Dec‐

10

Apr‐1

1

Aug‐

11

Dec‐

11

Apr‐1

2

Aug‐

12

Dec‐

12

Apr‐1

3

Aug‐

13

8.0x 8.5x 9.0x9.5x 10x EV

Source: Company & SKP Research

We recommend Buy rating on the stock with the 12 month target price of Rs. 405 per share, implying an upside of ~18% from current levels. We have arrived at the target by assigning to EV/EBITDA 10x of FY15E.

Biocon Limited.

SKP Securities Ltd www.skpmoneywise.com Page 6 of 7

Financial Performance: (consolidated)

Income Statement (March ending) Figures: Rs in crores Cash Flow Statement Figures: Rs in crores

Particulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15E

Net Sales 2,049 2,426 2,900 3,446

growth % 18.4% 19.5% 18.8% Net profit Before Tax (NPBT) 393 610 427 478

Other operating income 38 59 6 ‐ Depreciation 174 179 206 218

Total Income 2,087 2,485 2,906 3,446 Interest Expenses 12 8 10 18

Expenditure 1,569 1,942 2,285 2,732 Other (income/ loss) (39) (40) ‐ ‐

Raw materials consumed 775 975 1,141 1,366 Operating PB change in w. cap 540 758 643 714 purchased of traded goods 77 69 88 103 Change in working capital 98 (192) (176) (11)

Employee expenses 308 389 476 566 Taxes paid (74) (94) (101) (113)

Operating expenses 410 508 580 697 Net CF from operating activites 564 471 366 590

EBITDA 517 543 620 714 Capital Expenditure (256) (342) (616) (245)

Depreciation 174 179 206 218 Other income (103) (34) 22 ‐

EBIT 343 364 414 496 Net CF from Investing activites (360) (376) (594) (245)

Other Income 62 53 22 ‐ Inc./(Dec.) in Debt (52) 115 228 113

Interest Expenses 12 8 10 18 Dividend paid incl tax (100) (116) (176) (176)

Profit Before Tax 393 408 427 478 Other adjustment (35) (8) (10) (18)

Tax 54 98 101 113 Net CF from Financing activites (186) (9) 42 (80)

Profit After Tax 338 311 326 365 Net change in cash or cash equ. 18 87 (186) 264

growth % ‐8.2% 5.0% 11.9% Opening cash balance 359 369 474 288

Minority Interest (1) (4) ‐ ‐ Other bank balances 146 217 199 199

Exceptional income 1 202 ‐ ‐ Closing cash balance 523 673 487 751

NPAT & MI 338 509 326 365

No. of shares 20 20 20 20 EPS(excl. exceptional income) 17 16 16 18

EPS 17 25 16 18

DPS 5.0 7.5 7.5 7.5

Balance Sheet (March ending) Figures: Rs in crores Ratio Analysis

Particulars FY12 FY13 FY14E FY15E Particulars FY12 FY13 FY14E FY15E

Equity Capital 100 100 100 100 Earning Ratio (%)

Reserves & Surplus 2,172 2,594 2,742 2,931 EBITDA Margin 25.2% 22.4% 21.4% 20.7%

Shareholder's Fund 2,272 2,694 2,842 3,031 Net profit Margin 16.5% 12.8% 11.3% 10.6%

Non‐ current liabilities ROCE 15.0% 18.1% 10.4% 10.9%

Long term borrowings 70 164 406 483 RONW 14.9% 18.9% 11.5% 12.0%Long term & other LT provision 583 428 424 424 Valuation RatioMinority Interest 4 65 68 68 P/E (x) 20.3 13.5 21.1 18.8

Sources of funds 2,929 3,352 3,739 4,006 P/BV (x) 3.0 2.6 2.4 2.3

Gross Block 2,174 2,603 2,803 2,903 EV/EBIDTA (x) 11.3 10.6 9.8 8.3

Less: Depreciation 800 985 1,210 1,442 EV/ Sales (x) 2.9 2.4 2.1 1.7

Net Fixed Assets 1,374 1,617 1,593 1,461 Market cap/ sales (x) 3.4 2.8 2.4 2.0

Capital WIP 286 205 640 800 Dividend Payout 29.6% 48.9% 46.0% 41.1%

Total Fixed Assets 1,660 1,823 2,233 2,261 Interest coverage (x) 28.1 44.9 42.0 27.6

Investments 64 65 65 65 Balancesheet Ratio

Long term loans & Advances 213 289 348 413 Inventory Days 66 59 58 55

Total Current Assets 2,000 2,240 2,338 2,728 Debtors Days 88 77 73 66

‐Inventory 378 398 464 517 Creditors Days 155 126 134 133

‐Debtors 492 510 580 620 Debt/ Equity ratio 0.03 0.06 0.14 0.16

‐Cash & Bank Balances 523 673 487 751 Dupont Analysis (ROE) 16% 13% 12% 12%

‐Loans & Advances 114 137 174 207 NPAT/ EBT (tax burden) 0.86 0.76 0.76 0.76

‐Current investment 492 522 633 633 EBT/ EBIT (int. burden) 1.14 1.12 1.03 0.96

Total Current Liabilities 1,016 1,023 1,203 1,412 EBIT Margin 0.17 0.15 0.14 0.14

Net Current Assets 984 1,217 1,135 1,315 Asset /TO Ratio 0.97 1.02 1.07 1.21

Deffered Tax Assets 8 (41) (41) (48) Asset / Equity Ratio 0.98 0.96 0.98 0.97

Uses of Funds 2,929 3,352 3,739 4,006 Source: Company & SKP Research

Biocon Limited.

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The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call &InvestextMyiris, Moneycontrol, Tickerplant and ISI Securities.

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