Morning Insight

Morning Insight
27 May 2015
For private circulation only
Global Economies and Equities
 Most Asian stock indices fell this morning following weak US equities. Greece being on the
verge o default and continued strong economic data from the US bolstering confidence on
the rate hike by the FED led to weakness in many Asian equity markets this morning;
 Purchases of new homes in the U.S. rose more than projected in April, a sign this part
of the market is picking up steam during the busiest selling period of the year. Sales
increased 6.8% to a 517,000 annualized pace from a 484,000 rate in the prior month. The
improving job markets, low borrowing costs and a limited supply of existing homes is
helping lift demand for new properties;
 The Brent oil price has fallen below $64 a barrel, pressured by the possibility that U.S.
shale oil producers could increase drilling activity and as dollar allied against a basket of
currencies;
Indian Economy and the Equity Markets
 The domestic market declined for the second consecutive session to a one week low.
Lingering Greece fiscal woes and the impending derivatives expiry seem to have
dampened sentiments of the investors. The BSE Sensex ended at 27,531, lower by 112
points and the NSE Nifty settled below 8,350 at 8339, down 31 points. The broader
markets had a listless closing, with the Midcap and Small cap indices ending marginally
lower at 10,609 and 11,165 respectively. Surprisingly both the FIIs and DIIs were net
buyers of stocks worth Rs.114.81 crore and 123.85 crore respectively yesterday;
 Rupee fell the most in more than two weeks on speculation importers are stepping up
purchases of the greenback to pay month-end bills. The rupee slipped by 41 paise to end
at 63.98 a dollar, the most since May 7. The currency has declined 0.9% in May, heading
for a third straight monthly loss;
 The yield on the government bonds due July 2024, the current benchmark, rose three
basis points, to close at 7.89%, while the rate on the new 10-year notes due May 2025,
issued last week, fell one basis point, to 7.67%;
 Indian mutual funds have invested in equities for the 13th month in a row in May—
the longest spell of net mutual fund inflows into the stock market in at least 15
years. Mutual funds have invested a net of Rs.53,831.1 crore in Indian shares since last
May;
 Indian companies raised $727.33 million through external commercial borrowing (ECB)
in April 2015, down 72.70% from March 2015;
 The domestic equity market is likely to be quite weak in the remaining days of this week
due to poor results from a few corporate majors and ensuing derivative expiry. While Tata
Motors posted 56% yoy fall in its consolidated net profits, Tech Mahindra posted 23%
yoy fall and BHEL posted 52% yoy fall in its stand alone net profit for the March 2015
quarter. The kind of pressures BHEL is going through in its business is visible from the
fact that its inventories and receivables together stand at Rs.36,326 crore as of
March 31, 2015, which is 123% of its annual net sales (Rs.29,542 crore)!
Sector Developments
 The financial year FY2016 has started on a dull note for global steel producers, with
crude steel production in April declining 1.7% over a year ago, according to the World
Steel Association. The sequential decline was worse at 1.9% over March. In Asia, China’s
output fell by a relatively modest 0.7% and by 0.8% over March. Japan and South Korea
saw sharp cuts, while India’s output rose 2.1%, but declined by 3.6% sequentially;
 According to a latest report from the US Dept. of Agriculture, India’s coffee exports are
likely to decline 5.6% to 4.7 million bags in the ongoing marketing year ending in
September due to weak demand from major European buyers. The country had shipped
4.98 million bags of coffee during the 2013-14 marketing year (October-September);
Founder &
Managing Director
chokka.g@equinomics.in
Equinomics Research & Advisory Private Limited - Investment Adviser
27 May 2015
Equinomics
Morning Insight
|
Corporate Developments
 Heritage Foods reported quite impressive results yesterday – Net Sales for Q4FY2015 grew 23% to Rs.530.13
crore as compared to Rs.430.64 crore in Q4FY2014. The company has reported a 61% rise in its operating profit to
Rs.19.45 crore as compared to Rs.6.92 crore in the same period due to better operating margins as compared to
the period year ago. Whereas it’s net profit for the same period grew 82% to Rs.12.6 crore as compared to Rs.6.92
crore;
 Indraprastha Medical has reported 6.2% yoy growth in net sales for the quarter ended March 2015 while its net
has grown 5.6% to Rs.7.56 crore as compared to Rs.7.16 crore for the same period. The company has
recommended a dividend of Rs.1.80 per share for the year FY2015 which translates into a dividend yield of
3.2%;
We reiterate our “BUY” recommendation on BIOCON Ltd.
Biocon has posted 78% yoy growth in its net profit, on consolidated basis, to Rs.201.54 crore for the quarter
ended March 31, 2014 as compared to Rs.113.08 crore for the quarter ended March 31, 2014. This is mainly on
account of an exceptional income of Rs.105.06 crore, which BIOCON received on by selling its 10% in its
subsidiary Syngene to a private equity fund. EBIDTA for the quarter was Rs.202 crore, translating into quite
impressive margin of 24.3%. Net sales for the reporting quarter grew by 15% to Rs.830.38 crore as compared to
Rs.722.59 crore in quarter ended March 31, 2014, sequentially it reported a growth of 9% from Rs.761.09 crore. We
reiterate BUY on the stock for the following reasons:
 The reading of its balance sheet of BIOCON gives us a lot of comfort – its net cash (on standalone basis has gone up
by 43% yoy to Rs.638 crore as of March 31, 2015 from Rs.445 crore in FY2014. Moreover, BIOCON holds 86% stake
in Syngene for which it has filed prospectus with the domestic regulator for its IPO. The stake is valued at
~Rs.4691 crore. The Net Cash and its Syngene stake valuation together stand at ~Rs.5,329.06 crore, which is
59% of Biocon’s current market cap. We firmly believe that in the long run, the management of BIOCON would
reward the investors suitably using the cash pile;
 BIOCON has also commissioned its Malaysian insulin facility and commercialization of products from Malaysia
will commence post validation and regulatory approvals from respective countries. The earliest it is to get qualified by
the end 2016 or early 2017. The main aim of Malaysian facility (multi product) is to get ready for market
commercialization of Insulin especially Insulin Glargine. The growth opportunities will start from emerging
markets followed by the developed markets.
 Recently, BIOCON has also received approval for Insulin glargine for Mexico market through its partner PiSA
Farmaceutica, marking the beginning of commercialization of Insulin glargine in semi-regulated markets. The
combined market for insulin glargine in Mexico is estimated to be in excess of $40 million;
BIOCON is an emerging global biopharmaceutical enterprise focused on delivering affordable innovation. BIOCON is
catering to 16 major global players out of top 20 players in this segment. Sales are expected to grow at CAGR of 20%
during the period FY2015-2017. Over the decades, BIOCON has successfully evolved into an emerging global
biopharma enterprise, serving its partners and customers in over 75 countries. Globally out of 15, 6 drug brands are
biologics and the company with its expertise in biologics (Insulin, stains, immunosuppressant’s and oncology) will be a
key beneficiary. The company recently launched second generation insulin “INSUpen EZ” which is a low cost pen
which will help BIOCON to penetrate the market in a bigger way as insulin users are increasing at double digit growth
rates because of the incidence of diabetes and insulin dependence of many of the diabetics, which will help the
company to reach the goal of becoming the insulin company in the country.
BIOCON, trades at 17.2x its FY2016E EPS of Rs.26. Equinomics
Many smaller
pharma
companies
Indoco
Research
& Advisory
Private (like
Ltd | For
privateRemedies)
circulation only
are trading over 30x FY2015E earnings. BIOCON, which is more than 3 times bigger than companies like
Indoco remedies in terms of sales, trades at 23x its FY2015 EPS. With cash pile, unlocking values by listing its
subsidiary and expected increase in earnings from commercialization of Insulin Glargine from its Malaysia facility, we
firmly believe that this valuation gap would narrow down and BIOCON would ultimately command a better valuation
multiple. Considering the above facts we give a low risk rating to the stock and recommend our investors to
accumulate the stock with a revised target price of Rs.560 with an investment horizon of 1 year.
Disclosure: I, G.Chokkalingam, do not hold the shares of BIOCON directly or indirectly through friends, relatives or any
proxies.
Equinomics
Morning
Insight
| Equinomics Research & Advisory Private Ltd
Morning
Insight
BIOCON: Equinomics’ View on the Stock Risk and Suggested Investment Horizon
Stock Risk Profile
Investment Horizon
Low
√
1 Year
Moderate
High
Very High
1-2 years
2-3 years
3 years & Above
√
Disclosure: I, G.Chokkalingam, do not hold the stock directly or indirectly through any friends, relatives or any
proxies. I declare that I haven’t obtained any monetary benefit from the company, which is recommended here.
Stock Disclosure: Whether Stock Held By:
Biocon Ltd.
G.Chokkalingam & Family
Equinomics
NO
NO
Equinomics Research & Advisory Private Ltd
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G. Chokkalingam - Founder & Managing Director
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