Value Pick - Betting on Biocon

What Would You Say to the Following?

• Despite growing at a blistering pace of over 200% the year before, company X grows its net profit by another 42%
• PAT margins, already among the best in the sector (at 25%), have improved to 26%
• Every one of its businesses is profitable and growing
• The company is cash flow positive and generates enough to comfortably manage its operations and have some left over to fund acquisitions as well
• Company X possesses a patent on an innovative fermentation process, one of the core capabilities required for the business
• The company has recently launched human recombinant insulin into the market, one of only four companies worldwide that has been able to do so
• X is recognized globally in the field of statins, the world’s single-largest drug segment with a market size estimated at USD 23 bn globally
• The management team is extremely capable and experienced and almost all have been with the company for over a decade. Attrition levels at the company are a mere 1%, well below industry average
• The company has a research pipeline extending well into the next 5-10 years, beginning with lower-risk generics and moving on to high-risk, higher-value products
• Entry barriers into most of the company’s businesses are high, demanding sophisticated technology and regulatory clearances
• It has a clear vision, has delivered on every promise made to investors over the past few years and is poised to become a globally-recognized biotech and pharma major

Do You See A Dog? Or a Star??

The company is Biocon (www.biocon.com).

Debuting on the Indian exchanges in April 2004 at an impressive 52% premium (closing the day at Rs. 483) over the offer price, the stock is currently languishing in the early 400’s. The only explanation could be the general weakness of the market and perhaps lower-than-expected earnings, both of which have combined to make this a great buy!

At a PEG (Price / Earnings to Growth) ratio of around 0.5, the stock is almost certainly undervalued, even though its EV / EBITDA is quite high (around 12-14). Considering that it’s a growth business in a ‘hot’ industry, this state of affairs can only last as long as the overall market correction. Once the sensex swings the other way, this stock is poised to take off like a rocket!

Over the long term, given a couple of good breaks on new molecules / drugs, Biocon has the potential to really make it big. And, touchwood, if any of its products should become a blockbuster, the sky is the limit!

Have confidence.

Current Market Price: Rs. 395