Biocon Limited: Not rated Biocon Limited (Biocon), established in 1978, started as a manufacturer and exporter of enzyme. The company gradually shifted focus to a life science driven generic company with fermentation technology. Biocon is again going through a transition phase from being a generic company to a discovery led life science company. Statins sales to the US & Europe would be a major growth driver in the short term, while immunosuppresants, non-injectable insulin, Monoclonal Antibodies (MABs) and custom research will be Biocon’s drivers in the longer run.
However it will take some time for Biocon’s key growth drivers to start delivering. Sharp growth in immunosuppreants would be triggered when key patents expire in US/ Europe in FY08-10. Oral insulin is a big opportunity for Biocon but competition from established players may be higher than expected. Non-injectable insulin, a potential blockbuster is at least three years away from a potential launch. Biocon’s head & neck cancer molecule – BioMAB-EGFR has been launched successfully but it will take some time to realize the full potential of the market.
The only visibility in the near term is the continued growth momentum in the custom research space, which has witnessed revenue CAGR of 52% over FY01-06. Custom research projects are gaining increasing traction and are likely to maintain the current growth rate. At Rs358, the stock is trading at 20.9x H1 FY07 annualized earnings. We feel there is little downside to the stock from here but upsides could be capped unless key growth drivers start delivering earlier than expected.
Strides Arcolab Limited: Not rated
Strides Arcolab Limited (STAR) is one of India’s leading integrated manufacturers and exporter of finished pharmaceutical dosage forms with focus on niche molecules, which are difficult to manufacture or clinically difficult to prove efficacy. The company has significant presence in soft gels (18% of revenue) and sterile & immunosuppressant (32-35% of revenue). Semi-solids, another focus area, which could emerge as a significant growth driver for the company forms 10% of revenue. Finished dosage accounts for over 95% of the revenue for the company.
STAR has adopted a partnership model strategy for the regulated markets where it shares upsides and risks with its partners whereas it has set up its own front end for the semi regulated markets. STAR has 13 manufacturing facilities globally. The management has guided towards a 30% plus topline growth for CY06 and CY07 driven by increasing contribution from the regulated markets particularly America and Asia Pacific. Operating margins would start heading northwards as contribution from regulated markets increases. STAR is going through a consolidation phase post a series of acquisitions in 2006, full impact of which would be visible post H2 CY07. At Rs302, the stock is trading at 30.4x Q3 CY06 annualized EPS of Rs9.9.
Opto Circuits (India) Limited: Maintain BUY
Opto Circuits (India) Ltd (OCIL)’s operations for the core business and EuroCor are progressing in line with expectations. While the core business is expected to record 30% plus revenue CAGR to Rs2bn over FY06-08, EuroCor is on track to expand its geographical coverage to 36 countries by end 2006. However, net margins for EuroCor may be subdued in the short term on account of heavy advertising and promotional expenditure. OCIL has indicated that its products have started gaining preference with cardiologists who attended various seminars, conferences and live workshops conducted by the company. Appointment of Dr. O’Neill on board is likely to expedite the process for USFDA approval, but it is still 18-24 months away.
The management indicated that they would look at acquisitions, which could be a good strategic fit over the longer term and available at the right price. We believe OCIL would consolidate operations of EuroCor in the near term and focus on increasing penetration in key geographies. OCIL is also looking at conducting certain low-end manufacturing operations for EuroCor in India. As OCIL is under 100% EOU till 2009-10, tax outgo on those operations will be nil, which will again cut cost and boost margins.
We are confident that OCIL will witness revenue CAGR of 63% to Rs3.7bn over FY06-08. We estimate EuroCor to contribute at least 30% to the total revenue and profitability by FY08. The core business is also witnessing continuous demand for its products from the international markets. We firmly believe that the company is on track to witness earnings CAGR of 61.1% to Rs1bn over FY06-08. At Rs300, the stock is trading at 28.8x FY07E EPS of Rs10.4 and 18.4x FY08E EPS of Rs16.3. We maintain BUY with a target price of Rs326, from a 12-month perspective.
Bal Pharma Limited: Not rated
Bal Pharma Ltd. (BPL), a mid sized pharma company focused on the domestic and semi-regulated markets is jointly promoted by Mr. Ghevarchand Surana of Micro Labs Group, which has a turnover of over Rs.3bn, ranked No.20 in the Indian Pharma Industry and the Siroya family, a multi-million dollar non-resident group based in Dubai.
Bal Pharma clocked revenue of Rs746mn and PAT of Rs29mn for FY06. The management aims to clock revenue of Rs3-3.5bn over the next 4-5 years. For FY07 & FY08, the management has given a revenue guidance of Rs1bn and Rs1.35bn and profitability guidance of Rs60mn and Rs110mn respectively. At Rs39, the stock is trading at 6.8x FY07E and 3.7x FY08E.
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