Biocon Ltd, a leading biopharmaceutical company, has been given an "Accumulate" rating by Geojit Financial Services with a target price of Rs. 376. The recommendation reflects the company’s strong prospects driven by its biosimilars portfolio, strategic collaborations, and recovery in other business segments. Investors are advised to accumulate shares on dips, with an estimated 15% upside potential based on current market conditions.

Summary

Biocon Ltd demonstrated stable performance in Q2FY25, supported by a 3.7% year-on-year increase in consolidated revenue, primarily driven by its biosimilar segment. However, challenges persist in the generics and research services arms. The recent US FDA classification for its Biocon Biologics Park and successful collaborations in the global market are expected to boost the company's growth trajectory. Analysts at Geojit foresee improved earnings visibility and margin expansion, reiterating an "Accumulate" rating with a price target of Rs. 376.

Biosimilars Drive Revenue Growth

Key performance metrics:

The biosimilar segment grew by 10.8% YoY to Rs. 2,182 crore.
Strong demand from the US, UK, and emerging markets like South Africa contributed significantly to this growth.
The company’s focused investments in this segment, coupled with the US FDA’s Voluntary Action Indicated (VAI) classification for its Bengaluru facility, position Biocon well for new product launches. These developments are projected to enhance both revenue and profit margins.

Challenges in the Generics Segment

Revenue Decline: The generics segment experienced a 7.7% YoY decline to Rs. 624 crore, largely due to pricing pressures and operational challenges such as:

A planned shutdown at one of its API facilities.
Decreased demand for key formulations.
Signs of Recovery: The launch of the company’s first GLP-1 generic in the UK marks a positive turn, with expectations of broader market penetration.

Syngene: Early Signs of Recovery

The research services arm, Syngene, witnessed a 2.1% YoY revenue decline, settling at Rs. 891 crore. However, a pilot project in discovery services indicates early recovery. Strategic partnerships and growing demand in the US biotech funding space are expected to drive future growth.

Strategic Collaborations and Market Expansion

Global Licensing Agreements: Biocon has entered into agreements with pharmaceutical giants in the Middle East and Brazil to commercialize its GLP-1 products.

European Expansion: The settlement with Janssen and J&J allows Biocon to launch its biosimilar Ustekinumab in Europe, the UK, Canada, and Japan.

These collaborations underscore Biocon’s strategy to diversify geographically and broaden its product portfolio.

Financial Performance and Valuation

Key Financial Metrics:

FY25 revenue is projected at Rs. 16,087 crore, a 9% growth from FY24.
EBITDA is expected to grow by 16.8% YoY to Rs. 4,863 crore, with margins improving to 30.2%.
Adjusted PAT is forecasted at Rs. 953 crore, marking a temporary dip due to higher operational costs.
Valuation Metrics:

Current Price-to-Earnings (P/E) ratio stands at 39.8x FY25E EPS, moderating to 27.6x by FY26E.
Return on Equity (ROE) is projected to improve to 6.8% in FY26.

Investment Rationale

Geojit’s Analysts Highlight:

The stability provided by its biosimilar portfolio.
Recovery in generics and research services segments.
Long-term growth prospects fueled by strategic expansions and increased global demand.
The revised target price of Rs. 376 reflects a 33x FY26E EPS valuation, suggesting a 15% upside from the current market price of Rs. 327.

Risks to Consider

Operational Challenges: Delays in resolving US FDA observations could hinder product launches.

Market Risks: Price volatility and competition in the generics segment remain key concerns.

Macroeconomic Factors: Currency fluctuations and global regulatory dynamics may impact earnings visibility.