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MOSL: BIOCON (Neutral)-Biologics lead strong momentum in earnings

BIOCON: Biologics lead strong momentum in earnings

(BIOS IN, Mkt Cap USD5.3b, CMP INR620, TP INR670, 8% Upside, Neutral)

• Significant margin expansion on better product mix: 4QFY19 sales at INR15.2b (v/s our est. of INR16b) were up 31% YoY. EBITDA margin stood at 26.4% (in line), up 650bp YoY due to better product mix (gross margin: 64%, up 870bp YoY) and lower staff cost as % of sales (19.1%, down 90bp YoY). But, higher R&D cost/other expenses, both up 160bp YoY, weighed down EBITDA margin to some extent. EBITDA came in at INR4b (v/s our est. of INR4.2b), up 72% YoY.
• Lower tax rate led to higher-than-expected earnings: Tax rate during the quarter declined significantly to 13.8% v/s 21.8% YoY due to benefits (a) with respect to higher R&D spends, and (b) on carry forward losses for the UK entity. Thus, PAT grew higher than EBITDA at 92% YoY to INR2.1b (v/s our est. of INR1.9b). For FY19, sales/EBITDA/PAT stood at INR55b/INR14b/INR9b up 34%/68%/100% YoY.
• Biologics lead growth for the company: Revenue growth was largely led by Biologics (28% of sales), up 87% YoY at INR4.5b. Better traction of Pegfilgrastim in the US and Trastuzumab in the EU contributed meaningfully to the growth in this segment. Research Services (34% of sales) were up 30% YoY due to increased traction in discovery services. However, growth was dragged to some extent by the Small Molecules segment (30% of sales), which saw lower growth of 11% YoY and decline in branded formulations (8% of sales). 
• Con-call Highlights: (1) In Biologics, BIOS guided for revenue momentum and core EBITDA margin(Ex-R&D) to sustain in FY20 as well; (2) Branded Formulation sales growth would remain moderate due to revised downward pricing in the UAE market; (3) BIOS guided for gross R&D spend at ~15% of revenue (Ex-Syngene); (4) It also guided that effective tax rate would rise to 22-25% in FY20 due to lower R&D led benefits and carry forward losses.