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Dip into Biocon

Biocon’s fundamentals are strong, but it’s current PEG ration is high. Accumulate the stock on dips…

Could you please tell me about the fundamentals of Biocon? How strong is the company? Should I buy more of this stock? I already have its shares.
- Dr. Pankaj A. Joshi

Biocon is a global biopharmaceutical company with products and research services ranging from pre-clinical to clinical development and commercialisation. Its focus areas are diabetology, oncotherapeutics, nephrology, cardiology and immuno-dermatology.
The company has done a commendable job of evolving from a manufacturer of low-value industrial enzymes to a leading biopharmaceuticals player. It has also set up a successful franchise in the domestic market for branded formulations.

Biocon’s business has evolved significantly over the years. Its domestic branded business generates annual revenue of more than `180 crore, which is more than 13 per cent of the total biopharma revenue. It has a focused strategy of targeting specific therapeutic areas, where it has key product advantages and opportunities to build strong brands to combat the onslaught of low-cost competition.
It is one of the front-runners in biosimilar approvals in the regulated markets. Its biosimilar insulin deal with Pfizer adds revenue visibility and profitability over the next four to five years. Moreover, its focus on specialities, where it has key product advantages, ensures high profitability. The chronic lifestyle disease portfolio provides opportunities to build strong brands that can sustain profitability.
Biocon recently divested its 78 per cent stake in the German subsidiary, Axicorp. The company was plagued by the rebates demanded by the government and was struggling to generate healthy margins. This disinvestment is expected to improve Biocon’s margins as the German business was a drag on its margins.

The total income and profit after tax of Biocon have grown at a compounded annual growth rate (CAGR) 28.9 per cent and 16.9 per cent respectively. It has delivered a five-year average return on capital employed of 17.5 per cent and return on net worth of 18.9 per cent. It had a low debt-to-equity ratio of 0.17 at the end of FY11.
The stock is trading at a consolidated price-to-earnings (P/E) ratio of 18.58 which is below its five-year median P/E of 20.01. Based on five-year CAGR in earnings per share of 16.1 per cent, its price-to-earnings to growth (PEG) ratio comes to 1.2 times.
The company is fundamentally strong, but currently its PEG ratio is high. Therefore, accumulate this stock on dips.



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