WONDERLA HOLIDAYS LTD: MAKING WONDERS !!!

Scrip Code: 538268 / WONDERLA

CMP:  Rs. 414.50; Market Cap: Rs. 2,342.80 Cr; 52 Week High/Low: Rs. 429.85/ Rs. 245.25.

Total Shares: 5,65,00,670 shares; Promoters : 4,01,09,222 shares –70.98 %; Total Public holding : 1,63,91,448 shares –29.01 %; Book Value: Rs. 71.33; Face Value: Rs. 10.00; EPS: Rs. 9.60; Dividend: 20.00 %; P/E: 43.19 times; Ind. P/E: 51.12; EV/EBITDA: 23.79.

Total Debt: Rs. 7.49 Cr; Enterprise Value: Rs. 2,277.57 Cr.

WONDERLA HOLIDAYS LIMITED: Incorporated in 2002, Wonderla Holidays Ltd is one of the largest operators of amusement parks in India. The company came out with an IPO on April 2014 offering 1,45,00,000 equity shares of Rs. 10 each for Rs. 125 per share raising Rs. 181.25 Cr. The object of offer for sale was to set up an amusement park in Hyderabad and for other general corporate purposes. Wonderla Holidays Limited (Wonderla) is an operator of amusement parks in India. The Company owns and operates two amusement parks in Bangalore and Kochi under the brand name Wonderla. The Company also owns and operates a resort beside its amusement park in Bangalore under the brand name Wonderla Resort. The Company’s amusement parks offer a range of water and land based attractions catering to all age groups. Wonderla Kochi is located just 15 kilometers from Kochi city, is home for approximately 55 amusement rides. The dry rides at Wonderla comprise of land rides, sky rides and hi-thrill rides. Currently, Wonderla Holidays is in the process of setting up their third amusement park in Hyderabad. They also own and operate a resort beside the amusement park in Bangalore under the brand name 'Wonderla Resort' which has been operational since March 2012. Wonderla amusement parks offer a wide range of water and land based attractions catering to all age groups. They have 22 water based attractions and 34 land based attractions at Wonderla Kochi, situated on 92.95 acres of land and 20 water based attractions and 33 land based attractions at Wonderla Bangalore, situated on 81.75 acres of land. Wonderla Resort is a 'Three Star' leisure resort located beside their amusement park in Bangalore comprising of 84 luxury rooms, with amenities including banquet halls, a board room, conference rooms, a multi-cuisine restaurant, a solar heated swimming pool, recreation area, kid’s activity centre and a well-equipped gym. Wonderla Holidays Limited is locally compared with Nicco Parks & Resorts Ltd, Galaxy Entertainment Corp Ltd, Cineline India Ltd, Delta Corp Ltd, H.S India Ltd, T. Spiritual World Ltd, Oriental Hotels Ltd, B.L. Kashyap and Sons Ltd, Viceroy Hotles Ltd, Mahindra Holidays & Resorts India Ltd, Sterling Holidays & Resorts Ltd, EsselWorld, Appu Ghar, Queens Land, Vismaya, Tikuji-Ni-Wadi, Funtasia Water Park, Snow World, Jalavihar, Aquatica, Adlabs Imagica, Ramoji Film City and globally compared with The Walt Disney Company of USA, Twenty First Century of USA, Dreamworks Animations Plc of USA, Cedar Point of United states, Europa Park of Germany, Port Aventura of Spain, Six Flags Great Adventure and Wild Safari of USA, Blackpool Pleasure beach of United Kingdom, Everland of South Korea, Canada’s Wonderland of Canada, Ocean Park of Hong Kong, Efteling of Netherlands, Dreamworld on the Gold Coast of Australia, Busch Gardens of USA, Wisconsin Dells of USA.

Investment Rationale:

Wonderla Holidays is one of the largest amusement park companies in India and currently operates two amusement parks – one in Kochi and another in Bengaluru along with a resort adjacent to its Bangalore Park under the brand name 'Wonderla Resort'. Wonderla has 22 water-based attractions and 33 land-based attractions at Wonderla Kochi which is situated on 93.17 acres of land and 20 water-based attractions and 35 land-based attractions at Wonderla Bangalore, situated on 81.75 acres. The resort operated under the name, Wonderla Resort, is a ‘Three Star’ leisure resort located beside the amusement park in Bangalore comprising of 84 luxury rooms, with amenities including banquet halls, a board room, conference rooms, a multi-cuisine restaurant, a solar heated swimming pool, recreation area, kids’ activity centre and a well-equipped gym. Company has also acquired 49.57 acres of land for setting up the proposed amusement park in Ranga Reddy district of Andhra Pradesh. India has a large pool of young population. The median age of India’s population is around 27 years. The country has 61 % of its population under the age of 30 and 29 % below the age of 14 years. According to economic survey, India is expected to be the youngest Country in the world with the median age of population at 29 years by 2020. The young population is the main driver of consumer spending and looks for different modes of entertainment. Further, the child population is the influencing factor for parents to visit theme parks and play zones. Hence, this demographic dividend will benefit amusement parks as majority of its customers are in this age bracket. India has witnessed a steady increase in its per capita income over the years. Its per capita income at the current market price is estimated to increase at a CAGR of 15 % to Rs. 1.9 lakh in 2014-20E. Apart from rising per capita income, discretionary spend is also expected to increase significantly over the coming years led by higher disposable income, change in consumer spends and up-gradation of lifestyle. The share of discretionary spend is expected to increase from 59 % in FY10 to 67 % by FY20. Within discretionary spend, the share of leisure is expected to increase at a CAGR of 6.4 % to Rs. 8,98,400 Crore in CY 24. With a higher disposable income and increase in discretionary spend, entertainment companies like theatres and theme parks have been able to increase average ticket prices and also witness an improvement in non-ticket revenues over the years. The Indian amusement park industry is still at a nascent stage, the size of amusement park industry in India is estimated to be Rs. 2,600 Cr ($0.4 billion) with 150 amusement parks in India and globally the amusement park industry is of size of Rs 1,62,500 Cr ($25 billion), and this gives a huge opportunity for this industry. Indian amusement park industry got started with Appu Ghar in 1984. In late 90’s other large players like Essel World and Nicco Park started their operations in Mumbai and Kolkata respectively. Indian amusement park industry is growing in terms of footfalls though still at a very nascent stage compared to its global peers. It witnesses an annual footfall of 5.8 Cr to 6 Cr. The primary drivers to attract footfalls are size of the park, proximity of location and innovative offerings. Water parks are more popular in India due to the hot and humid weather. This Industry is broadly categorised into Large Parks, Medium Parks & Small Parks. Capex required for large parks are more than Rs. 70 Cr with land size of more than 40 Acres and can have annual visitors of around 5 lakhs. Large parks are usually located in Metros cities and in outskirts like Essel World of Mumbai, Nicco Park of Kolkata, Kishikinta of Chennai, Wonderla of Kochi & Bangalore, there are 16 t 18 such Large Parks in India. Medium Parks: Capex required for Medium parks are between Rs. 30 Cr to Rs. 70 Cr with required land size of between 10 to 40 Acres and can have annual visitors of around 3 to 5 lakhs. Medium parks are usually located in Outskirts of metros, Tier 1 Cities like GRS Fantasy Park of Mysore, Ocean Park of Hyderabad, there are about 40 to 50 such parks in India. Small Parks: Capex required for Small parks are about Rs. 30 Cr with required land size of around 10 Acres and can have annual visitors of around 3 lakhs. Small parks are usually located in Tier II cities, small towns, outskirts of metros and Tier 1 Cities like Fun N Food Kingdom of Dehradun, there are about 85 to 95 such parks in India. Wonderla has two parks that are mature i.e. Wonderla Kochi and Wonderla Bengaluru. Both parks have been able to clock RoCE of 35 %. Both parks have been able to maintain average EBITDA margin of 45 % in FY11-16 led by stable footfall, competitive pricing and operating leverage as 70 % of cost is fixed. Robust cash flow from these parks and lower capex spend are expected to enable Wonderla to not only support growth but also help the Company to fund its Hyderabad capex and losses in the initial years. WHL has also been able to increase its blended realisation per footfall at a CAGR of 15.6 % in FY11-16. A consistent increase in realisation and stable EBITDA margins has enabled the company to reduce its payback period from nine years in Kochi to 7.5 years in Bengaluru. The payback period in Hyderabad is expected to further reduce to seven years led by higher realisation and healthy EBITDA margins. WHL has commissioned a third park in Hyderabad. The park has better Connectivity compared to other parks in Hyderabad – it is close to the airport and located outside the ring road that connects to Hyderabad city. Hyderabad has 1.2 Cr people with per capita income of Rs. 1,32,862 which is one of the highest in south India. Coupled with favourable macros like GDP CAGR of 10 % in FY06-14, the park is expected to witness robust footfall and healthy realisation over the coming years. The Company has guided for footfall of 7 lakh and gross realisation of Rs. 990 leading to gross revenues of Rs. 69.0 crore. The company aims to achieve footfall of 10 lakh over the next three years. The restaurants at the Hyderabad park are owned by Wonderla. Hence, WHL will realise higher gross margins 45 % in the F&B segment, positively impacting overall margins. Wonderla also offers discounts ranging from 10-30 % for group bookings and corporate booking. It books revenue “net of discounts” and “net of taxes”, thus reflecting prudent accounting. Another innovative pricing used by Wonderla is “Fast Track” pricing strategy, which commands 100 % premium over regular prices. Also Company issues 250 tickets per day as fast track tickets, which reduce the average waiting time for a visitor substantially. Even though average realization is high in Fast Track prices, Wonderla is also planning to limit the number of tickets to 250 per day. Wonderla has set-up in-house capabilities in Kochi to design, develop and manufacture rides. This reduces the capex, maintenance costs and the down-time for a ride for Wonderla. The Management claims to manufacture rides at 1/3rd of the cost of procuring externally. Around 1/3rd of rides are manufactured in-house. As of January 31, 2014, company constructed 42 rides, of the total 55 attractions, Wonderla Kochi and Bangalore has 10 and 18 rides imported respectively. Balance is either in-house manufactured or domestically sourced. In-house manufacturing benefits Wonderla with certain cost efficiencies such as saving on import duties and other costs, besides improving the efficiency in rides maintenance. Wonderla has relatively low ticket price base, management expects 5-7 % and 8-10 % growth in footfall and ticket price respectively over the medium term at existing parks. From existing parks, management guides operational cash flow of about Rs. 40 Cr to Rs. 45 Cr pa. An improving economy, higher discretionary spend, rising footfall, better pricing power, growth in non-ticket revenues and limited competition are likely to remain key drivers of growth in FY16-18E. Given this scenario, it is expected that the Bengaluru and Kochi parks to grow at a CAGR of 13.0 % in FY16-18E. It is expected that the addition of the Hyderabad park which is operational from April 2016 and Wonderla resort which is expected to grow at 15.0 % CAGR in FY16- 18E to further drive revenues. Overall, it is expected that its net sales to grow at 30.8 % CAGR to around Rs. 351 crore in FY16-18E. Wonderla’s Return ratios like RoE and RoCE have historically remained healthy. Wonderla enjoys RoCE of more than 30 % supported by free cash generation from amusement parks as they attain maturity due to high EBIT margins, lower incremental capex and improved revenue mix.

Outlook and Valuation: 

Wonderla Holidays Limited is a part of the Kochi based V-Guard group. Wonderla Holidays is a very unique in business model with inherently strong profitability at an attractive valuation. Wonderla has high operating margins; high ROCE, niche & ambitious expansion plans make it an attractive stock to pick. Wonderla is a large park and there are only 15-16 large amusement parks in India. As there are no large amusement parks in the locations where Wonderla is situated, it is a huge advantage for the company. Though there are few small and medium sized parks in Kochi and Bangalore respectively, they cannot compete with Wonderla. Wonderla Chennai is in pipeline and company intends to expand its business operations and develop its brand ‘Wonderla’ by setting up new amusement parks in other parts of India and thereby cater to a wider customer base. It plans to capitalize on experience and expertise in the amusement park industry and leverage the existing goodwill associated with the brand to establish and expand amusement parks in newer geographies. Hence, management is in the process of identifying a suitable parcel of land in Chennai for setting up amusement parks. Amusement parks are one-day entertainment concepts in India, whereby visitors arrive in the morning and leave at the end of day, making the parks a “one day” attraction. However, with the introduction of company’s resort, it has become more of a “destination” park. Wonderla launched its first leisure resort by the name “Wonderla Resort” besides the amusement park in Bangalore in March 2012. The resort comprises of 84 luxury rooms with amenities including banquet halls, a board room, conference rooms, a multi-cuisine restaurant, rest-o-bar, a solar heated swimming pool, recreation area, kids’ activity center and a well-equipped gym. This resort has complete facilities compared to others, 24-hour dining facility, LCD television, Wi-Fi connectivity etc. It has four banquets spread across 8,900sqft, which can accommodate 800 guests and also has a board room. Thus, the resort can host multiple events like weddings, corporate meetings, parties etc. India, being one of the youngest countries in the world and enjoys demographic dividend with the median age of 26.5 years, has majority of its population between 15-59 years, which will be the biggest growth driver for this industry. Countries like the US, Japan and China have older population with median age of 37.1 years, 45.4 years and 35.9 years respectively. As per the study conducted by E&Y, in India, children are the key influences for amusement and theme parks visits. They generally come to parks in school groups or with families. But they constitute only 25 % of the park visitors and balance 75 % are adults. In India, around 28.50 % of the population lies in the age group of 0-15 years, 63.40 % in 15-59 years and 8.10 % in 60 years and above, respectively. Ticket sales form the major source of revenue stream for amusement parks in India. In India, the parks revenue constitutes areas like Food & Beverages merchandising which contributes 18 % as against global average of 34 %; Entry fees contributes 20 % as against global average of 33 %; Resort rentals and others contributing 2 % as against global average of 33 %. Globally, entry fee, food and beverages and resorts and rentals contribute similar proportion to revenue. For Wonderla, Food and Beverages contribute 3-4 % of the total revenue. Wonderla management has maintained its guidance of achieving footfalls of 65 lakh in FY2017 from the Hyderabad Park, while it will take some time for revival in footfalls in the Bangalore and Kochi parks as price hikes will get absorbed in the coming quarters. Also, the management is planning to add two new rides in Kochi by the end of Q2FY2017 with an investment of Rs. 25 to 30 crore. Also, it is planning a capex of Rs. 90 crore at the proposed Chennai park. The commencement of work for the Chennai park will start once the project is finalised and detailed planning is done. The funding of the capex will largely be done through the internal accruals. Company would initiate extensive promotional activities to improve the footfalls at both the existing parks. Overall, the company expects its matured park footfalls to grow by 4 % to 5 % in the coming years. The non-ticket revenues would continue to support the overall revenue growth. OPM is expected to remain lower in FY2017 and is expected to improve gradually in FY2018 once Hyderabad Park attains certain scale of operations. Bengaluru resort is performing better as its revenue grew by 11 % YoY in Q1FY2017, with an occupancy ratio of 67 % as against 48 % in Q1FY2016. The average room rentals of the resort stood at Rs. 4,608 per room per day as against Rs. 5,147 per room per day. The management expects the Bangalore resort’s performance to improve in the coming quarters. It also expects gradual improvement in the profitability of the resort. In all on financial side for Q1FY2017, Wonderla Holidays revenue grew by 29.6 % to Rs. 88.9 Cr. It’s operating profit margin (OPM) contracted to 44.1 % in Q1FY2017 from 60.7 % in Q1FY2016. The commissioning of the Hyderabad Park in April led to a sharp increase in the overall operating cost as advertisement & promotional spends and direct operating expenses almost doubled YoY. Also, other expenses included Rs. 4.5 Cr provisioning toward service tax, leading to a significant decline in OPM during the quarter. Operating profit fell by 6 % YoY to Rs. 39.2 Cr and the Profit After Tax declined by 20 % YoY to Rs. 22.5 Cr. Wonderla enjoys a moat as this sector has high entry barrier due to huge capital investment and limited number of large amusement parks in India coupled with favourable demographics and rising discretionary spend augur well for WHL. It is expected it to witness a sharp improvement in footfall and realisation led by addition of new parks and Favourable demographics. Compring Wonderla with its peers on a PE basis, it appears that enough valuation headroom is left, given that larger US‐listed peers like Six Flags, Cedar Fair trade between 14x‐27x on CY14 basis. Amusement parks attain maturity; they can throw up significant cash flows since they require only maintenance capex: for instance, in FY10 and FY11, when there was no large ongoing project, capex/sales was just 5 %‐7 % which helped generate large free cash flows. Further, WHL has been able to generate higher cash flow driven by healthy margins at mature parks. As a result of high cash flow generation, the company has been able to keep its debt to equity lower and also been able to expand through internal accruals. WHL has consistently maintained an EBITDA margin of 45.0% (highest among Indian and global peers). Further, a healthy balance sheet (0.3x D/E vs. 1.46x for Adlabs), strong cash flow generation and revenue & EBITDA CAGR of 30.7 % and 37.5 %, respectively, in FY16-18E demands premium Valuations. At the current market price of Rs. 414.50, the stock is trading at a PE of 36.04 x FY16E and 25.27 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 11.50 FY17E and Rs. 16.40 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY15	FY16	FY17E	FY18E
SALES (₹ Crs)	181.90	205.40	292.30	367.40
NET PROFIT (₹ Cr)	50.60	59.80	65.20	92.80
EPS (₹)	9.00	10.60	11.50	16.40
PE (x)	44.10	37.30	34.30	24.10
P/BV (x)	6.30	5.50	4.60	3.90
EV/EBITDA (x)	25.40	25.30	20.90	13.50
ROE (%)	20.00	15.80	15.60	20.00
ROCE (%)	37.70	15.60	23.00	29.30

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BIOCON LTD: GROWTH IS IN IT'S DNA !!!

Scrip Code: 532523 / BIOCON

CMP:  Rs. 831.00; Market Cap: Rs. 16,620 Cr; 52 Week High/Low: Rs. 846.80 / Rs. 395.30

Total Shares: 20,00,00,000 shares; Promoters : 12,13,57,446 shares – 60.68 %; Total Public holding : 7,86,42,554 shares – 39.32 %; Book Value: Rs. 202.74; Face Value: Rs. 5.00; EPS: Rs. 46.82; Dividend: 100.00 % ; P/E: 17.74 times; Ind. P/E: 27.59; EV/EBITDA: 11.75 times. Total Debt: Rs. 2,477.70 Cr; Enterprise Value: Rs. 17,970.70 Cr.

   

BIOCON LTD: The Company was incorporated as Biocon India Private Limited on November 29, 1978 and is based in Bengaluru. Biocon Limited is a biopharmaceutical company, which is engaged in the manufacture of pharmaceuticals, medicinal chemical and botanical products. The company came with an IPO in February 2004 with an offer of 1,00,00,000 equity shares of Rs. 5 each at Rs. 315.00 per share, raising Rs. 315 Cr. It got listed on April 7, 2004 at Rs. 425 and made high of Rs. 506.70 with a low of Rs. 425 on listing day. The objects of the issue were to achieve the benefits of listing on the Stock Exchanges and raising capital for financing to setting up new facilities to augment our capacities for submerged fermentation and chemical synthesis operations & for the other corporate purposes. The company gave bonus in April 2008 in ratio of 1:1, and has not given any in its shares. The Company operates through two segments: Active pharmaceutical ingredients (Pharma), and Contract Research And Manufacturing services (CRAMS Contract Research). It is engaged in manufacture of biotechnology products for the pharmaceutical sector, and also engaged in research and development in the biotechnology sector. The Company is also engaged in providing contract research and manufacturing services to overseas customers in the field of synthetic chemistry and molecular biology and undertakes clinical research activities on discovering new biomarkers and is discovering new diseases subsets and data-based on pharmacogenomics. Biocon’s presence straddles in four main therapeutic areas: Diabetology, Cardiology, Nephrology and Oncology and plans to introduce two new divisions, Comprehensive Care, and Immunotherapy. It offers a portfolio of bio similar insulins, recombinant proteins and monoclonal antibodies. Its products include Insugen, BASALOG, BIOMAb EGFR, Abraxane, CANMAb, ALZUMAb, ERYPRO, BLISTO, Cytosorb and Cimivir. In research services, Syngene International Limited (Syngene) is engaged in the business of custom research in drug discovery while the other fully owned subsidiary Clinigene International Limited (Clinigene) is in the clinical development space. Syngene is a now a listed entity in Indian Capital Market. In December 2009, Biocon acquired the Active Pharma Ingredients (API) undertaking from IDL Speciality Chemicals Ltd., a subsidiary of Gulf Oil Corporation Limited. BIOCON Ltd is locally compared with Alpa Laboratories Ltd, Panacea Biotech Ltd, Hester Bioscience Ltd, Wockhardt Ltd, GlaxoSmithKline Pharma Ltd, Jubliant Life Sciences Ltd, Wyeth Ltd, Lyka Labs Ltd, Cadila Healthcare Ltd, Novartis India Ltd, Syngene International, Vivo Biotech Ltd, Celestial Biolabs and Globally with Anavex Life Sciences Corp of USA, Bayhill Therapeutics, Inc. of USA, Cephalon Inc of USA, Halozyme Therapeutics Inc of USA, Immunex of Denmark, Myriad Genetics, Inc of USA., OncoMed of USA, Proteolix of USA, Tanox , Xoma Corporation, Taconic of Denmark, QPS of Austria, Baxalta (Shire) of Austria, Pfizer of Belgium, Sanofi Genzyme of Belgium, Ergomed of Bosnia, Allergan of Bulgaria, Lonza of Cezch Republic, Novozymes of Denmark, Novo Nordisk of Denmark, Medix Biochemica of Finland, Graftys of France, Allecra Therapeutics of Germany, Bioaxis Healthcare of Greece, Omixon of Hungary, Pinewood (Wockhardt) of Ireland, GlaxoSmithKline Pharma of UK.

Investment Rationale:

Biocon started as a niche player with its unique expertise in fermentation technology to build global leadership in manufacturing and supply of statins. Over time, the statin business was commoditised, but the company leveraged its expertise in fermentation to build its presence in high-entry barrier biosimilar space. The company has accelerated its biosimilar development efforts to emerge as a front-runner in the race to launch biosimilar products in regulated and developed markets. The company has four biosimilar products (Insulin Glargine, Trastuzumab, Pegfilgrastim, and Adalimumab) in late stage clinical trials intended for approval in developed markets (US and EU). Besides having a front-end product business, Biocon also successfully nurtured and developed contract research and manufacturing business, which was recently listed on the bourses as Syngene International. By virtue of its strong client relationship and full service offering in the contract research and manufacturing space, Syngene continues to grow at a notably fast pace at more than 20 %. The characterisation capabilities that the company has developed by virtue of its developmental efforts on the biosimilar front is being leveraged for filing of Abbreviated New Drug Application (ANDA) application on complex chemical drugs products like Copaxone. The company so far has made 7-8 ANDA applications and is looking for 5-6 filings each year. The company potentially runs a cost advantage on these products by virtue of Global scale in APIs of these products. Biocon is aspiring to reach US$1bn in annual revenues by FY19 and believes that a large part of the potential growth will came from sale of biosimilars, and there will be growth in branded formulations business and research services business. The biotechnology sector of India is highly innovative and is on a strong growth trajectory. This sector, with its immense growth potential, will continue to play a significant role as an innovative manufacturing hub. The sector is one of the most significant sectors in enhancing India's global profile as well as contributing to the growth of the economy. India is among the top 12 biotech destinations in the world and ranks third in the Asia-Pacific region. India has the Second-highest number of US Food and Drug Administration (USFDA) approved plants, after the USA and is the largest producer of recombinant Hepatitis B vaccine. Out of the top 10 biotech companies in India (by revenue), seven have expertise in bio-pharmaceuticals and three specialise in agri-biotech. The Indian biotech industry holds about 2 % share of the global biotech industry. The biotechnology industry in India, comprising about 800 companies, is growing at an average rate of about 20 %. The Indian biotechnology sector is expected to grow from the current US$ 5-7 billion to US$ 100 billion by 2025, growing at an average rate of 30 %. Biopharma is the largest sector contributing about 64 % of the total revenue followed by bioservices at 18 %, bioagri at 14 %, bioindustry at 3 %, and bioinformatics contributing to 1 %. With the country offering numerous comparative advantages in terms of R&D facilities, Knowledge, skills, and cost effectiveness, the biotechnology industry in India has immense potential to emerge as a global key player. India constitutes around 8 % of the total global generics market, by volume, indicating a huge untapped opportunity in the sector. Outsourcing to India is projected to spike up after the discovery and manufacture of formulations. Hybrid seeds, including GM seeds, represent new business opportunities in India based on yield improvement. India currently has a marginal share in the global market for industrial enzymes that is estimated to reach about US$ 4.4 billion by 2015. Hence, there is an opportunity in focused R&D and knowledge-based innovation in the field of industrial enzymes, which can innovatively replace polluting chemical processes into eco-friendly processes that also deliver environmental sustainability. India has all the ingredients to become a global leader in affordable healthcare. If there is an annual investment of US$ 4.01 billion to US$ 5.02 billion in the next five years, the biotech industry can grow to US$ 100 billion by 2025, with a 25 % return on investment, and set a growth rate of 30 % year-on-year. For Biocon, the small molecules segment accounts for 42 % of the turnover and comprises Active Pharmaceutical Ingredients (API) like statins, immune-suppressants and specialty APIs and also includes generic formulations business. This vertical is witnessing pricing pressure in some products. The company is exploring fewer opportunities but with higher profitability in this segment such as moving into formulations and filing own ANDAs, 505 (b) (2) filings, etc. It has already filed seven or eight ANDAs cumulatively. These include complex generics and injectable. It is expected that the small molecules segment can grow at a CAGR of 13.5 % to Rs. 1,787 crore in FY16-18E. The biologics segment includes novel biologics and biosimilars, including rh-insulin, insulin analogs, monoclonal antibodies and recombinant proteins. This segment accounts for 12 % of the Biocon turnover. Biocon is mainly focusing on following therapies -diabetology, oncology and immunology. The company has invested heavily in this space over the last two or three years, especially the Malaysian facility. The progress, so far, is encouraging with launches in emerging markets, Glargine launch in Japan and filing arrangements in the EU and US. Biologics is expected to grow at a CAGR of 40 % in FY16-18E. Biocon’s research arm SyngeneInternational Ltd contributes 32 % to its turnover. Syngene is the contract research organisation (CRO) arm of Biocon with proven capabilities. The company caters to 256 clients including eight out of global top 10 global players. This segment has been consistently growing at 20 %+ rate. Syngene provides variable cost alternative like full-time equivalent (FTE) and fee-for-service (FFS) to the traditionally fixed cost, in-house, resource intensive business model of R&D focused organisations. The company has developed long-term relationships and has multi-year contracts with its clients, including three long-duration multidisciplinary partnerships with Bristol-Myers Squibb (BMS), Abbott Laboratories (Singapore) and Baxter International. The company also provides clinical research and clinical trial services through its subsidiary Clinigene. In August 2015, Syngene had raised Rs. 550 crore through IPO. Recently, it has been the major growth driver for the company as biopharma segment has seen some slow down. It is expected that the revenues from it to grow at a CAGR of 25 % in FY16-18E. The branded formulations business includes the finished dosage business in India and overseas including UAE. It constitutes 15 % of the Biocon turnover. It comprises Indian domestic formulations. Biocon owns 80+ brands encompassing therapies like diabetology, oncology, nephrology, cardiology, immunotherapy, comprehensive care and bio-products. Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) have already reached the critical milestone of global Phase III clinical trials. The company is also planning to start US and EU filings from FY17 with Mylan. Biocon entered into a partnership with Mylan for six biosimilar programs (Trastuzumab, Pegfilgrastim, Adalimumab, Bevacizumab, Etanercept and Filgrastim) and three insulin analog programs (Glargine, Lispro and Aspart). Biocon’s Japanese partner Fujifilm Pharma (FFP) has launched Insulin Glargine in Japan. The company has received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon and is being commercialised by FFP in Japan. Among therapies, diabetology is the largest therapy, which accounts for 60% of branded formulations. Some of its unique launches are INSUPen (insulin delivery device), Biomab (novel biologic for oncology) and Alzumab (novel biologic for Psoriasis). The pipeline includes CANMAb (biosimilar version of oncology product Herceptin). This segment constitutes 15 % of overall sales. Biocon is India’s premium biopharmaceutical company, which has demonstrated industry-leading capabilities in developing the most complex biosimilar products. The company is a frontrunner in the race to introduce biosimilar products for developed markets. In recent weeks, Biocon’s stock price has run up notably in anticipation of growth presented by the launch of biosimilars in regulated markets. And it is believed that Biocon will continue to post growth in coming future.

Outlook and Valuation: 

Biocon Limited is India’s largest and fully-integrated, innovation-led biopharmaceutical company. As an emerging global biopharmaceutical enterprise serving customers in over 100 countries, it is committed to reduce therapy costs of chronic diseases like autoimmune, diabetes, and cancer. Through innovative products and research services it is enabling access to affordable healthcare for patients, partners and healthcare systems across the globe. It has successfully developed and taken a range of Novel Biologics, Biosimilars, differentiated Small Molecules and affordable Recombinant Human Insulin and Analogs from Lab to Market. Some of its key brands are INSUGEN® (rh-insulin), BASALOG® (Glargine), CANMAb (Trastuzumab), BIOMAb-EGFR (Nimotuzumab) and ALZUMAb (Itolizumab), a first in class anti- CD6 monoclonal antibody. It has a rich pipeline of Biosimilars and Novel Biologics at various stages of development including Insulin Tregopil, a high potential oral insulin analog. Biocon’s Herceptin derives about US$2bn in sales from Herceptin in international markets. It is believed that not all of Herceptin sales in international markets will be immediately accessible for biosimilar players because of different intellectual property or IP situations and regulatory bars across geographies. There are ways that biosimilars can look to play the emerging market potential. One is to cannibalise the existing market pie and the other is to expand access by discounting the prices to a level where affordability is significantly enhanced. For now, Biocon will discount its biosimilar by 60 % and get an 8 % share of the available pie i.e. 50 % of international markets’ sales and also expand the market by 20 % from the current level. This translates into incremental sales of US$75mn in international markets. Biocon’s has unexpired patents protecting Lantus, Biocon may enter the market only after a settlement with Sanofi and can reach the market in second-half of 2018. It is expected to have double-digit royalty payment from Biocon/Mylan to Sanofi. Biocon should be the third entrant after Eli Lilly and Merck. And there is a very low probability that pharmacists may be allowed to substitute Lantus with biosimilars. In a best-case scenario, pharmacy substitution for Lantus may be allowed for vials. However, the vial market is reducing every year and with the launch of Toujeo the cannibalisation of vial market (most of which is in US) will accelerate significantly. The recent run up in the stock price has discounted a greater proportion of the potential opportunity, but the risks are underappreciated. Direct competition from other biosimilar players and next generation molecules from innovators casts major uncertainty over realization of potential benefits in the near to mid-term. The investments that have been made so far are significant and the business would require further investments. This would limit free cash flow generation. Over the next 3-4 years, the larger part of the opportunity for Biocon will be driven by emerging markets, while regulated markets will have limited contribution. A better way to play the potential opportunity presented by the biosimilar space would be a large cap pharma company that is poised well in the biosimilar space. On financial side, Biocon during Q1 FY17 reported consolidated net profit of Rs. 166.60 Cr an increase of 31.97% from Q1 FY16. It reported its consolidated revenue for the quarter which rose by 17.94 % to Rs. 982.40 Cr. During Q1 FY17, Biocon reported consolidated EBIDTA of Rs. 304.00 Cr up by 28.98 %. During Q1 FY17, it reported its consolidated Profit before tax to Rs. 232.00 Cr. EPS of the company stood at Rs. 8.33 a share during the quarter, as against Rs. 6.31 per share over previous year period. Biocon’s gross R&D spend stood at Rs 92 Cr in Q1 FY17, reflecting the progress of Generic Formulations, Biosimilars and Novel programs. Net Sales and PAT of the company are expected to grow at a CAGR of 12 % and 13 % over 2015 to 2018E respectively. There’s significant capex towards biosimilar manufacturing and foray of Syngene into Contract manufacturing will limit free cash flow generation. With encouraging developments on biosimilars front in last six months have hogged the limelight especially the approval & launch of Glargine in Japan and presentation of Trastuzumab data to ASCO. And launches in emerging markets are also getting momentum. These developments are testimony to Biocon’s progress. With the Malaysian facility getting ready for global filings, it is believed that the future bodes well for it on the biosimilars front. It will also provide an extra lever for growth besides Syngene and branded formulations. Strong performance of the company during the quarter has been driven by an all- round growth of its business across Small Molecules, Biologics, Branded Formulations and Research Services. Biologics business delivered a growth of 53 % driven by the sales of biosimilars in emerging markets. The submission of Pegfilgrastim, Biocon’s first biosimilar filing in EU, is a critical milestone this quarter. Biocon Insulins business made a mark with the launch of Insulin Glargine in Japan. In addition the company received regulatory approvals from MoH, Malaysia, for rh-Insulin and Glargine which will enable commercialization of these products. Biocon is on track for filing some of its Biosimilars and Generic Formulations in the developed markets later this year. On SOTP (sum-of-the-parts) basis, the value of BIOCON alone comes at Rs. 534.40 per share valueing 22 x its FY18E EPS of Rs. 24.30. The valuation of the Syngene taking valueing Biocon's at 74.60 % stake comes to Rs. 372.26  per share. And valuing the whole gives us the value of BIOCON of Rs. 906 per share. At the current market price of Rs. 831.00, the stock is trading at a PE of 27.97 x FY17E and 24.93 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 29.70 in FY17E and Rs. 33.33 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

SOTP VALUATIONS : (FY18E)

Business Subsidiary	Value Per Share (₹)
BIOCON Standalone	534.40
Syngene International (EPS Rs.18.5 x 27PE) Rs. 499.50
Biocon's value in Syngene per share (74.60%)	372.26
TOTAL Value per Share (Rs.)	906.66

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	3,089.81	3,485.40	3,973.35	4,489.89
NET PROFIT (₹ Cr)	497.43	896.10	594.73	666.62
EPS (₹)	24.87	44.81	29.70	33.33
PE (x)	32.52	18.05	27.23	24.26
P/BV (x)	4.95	3.99	3.48	3.05
EV/EBITDA (x)	21.41	18.01	15.40	14.01
ROE (%)	16.16	23.94	13.80	13.38
ROCE (%)	22.55	17.58	17.53	16.78

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*As the author of this blog I disclose that I do not hold  BIOCON LTD in my any of the portfolios.

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