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Mark to Market: Biocon leaves market cold

Mark to Market: Biocon leaves market cold
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First Published: Thu, Jul 19 2007. 12 26 AM IST
Updated: Thu, Jul 19 2007. 12 26 AM IST
Biotech company Biocon Ltd reported sales and profit figures that beat consensus estimates by more than 10%. It also announced the divestiture of its enzymes business, for a handsome consideration of over four times trailing sales.
But this did little to improve the sentiment for Biocon shares, which remained flat at the Rs460 levels. Most analysts have a sell rating on the stock, which has returned -4.5% since its listing in April 2004. In the same period, the Nifty has risen by over 140%.
The concern is about Biocon’s high dependence on statins and the lack of any other major products in its portfolio. Any pressure on pricing could hit margins hard at a time when costs like R&D are on the rise.
But none of these concerns were reflected in Biocon’s June quarter numbers. Sales grew 28% to Rs271 crore, led by the biopharmaceuticals division, which accounted for three-fourths of the incremental revenues. Contract research revenues continued to grow at a fast pace—last quarter, they grew 52%. Analysts suspect these could include some licensing fees, which could also be the reason for the growth in profitability. Operating margin rose 257 basis points last quarter, leading to a 41% jump in operating profit. Given the company’s high export revenues, it’s commendable that profit has grown at a high base despite the rupee’s appreciation.
Further, the sale of the enzyme business provides Biocon with $100 million (about Rs4 crore) in cash, which it can use to grow inorganically. Yet, going by the way the Biocon stock reacted to the results on Wednesday, it seems like the good performance would have to continue for analysts to change their sell ratings. Other triggers for a re-rating could be the announcement of an acquisition or the launch of new products. For now, the trailing price-earnings multiple of 22 times adequately captures visible growth opportunities.
Several trends are apparent from the June quarter bank results declared so far. The received wisdom was that while deposit rates had gone up during the quarter, all banks had raised their lending rates earlier and the net impact would be an expansion in margins. That hasn’t happened—net interest margins (NIMs) have contracted, compared to the March quarter. HDFC Bank Ltd’s NIMs are down to 4.2%, from 4.5% in the previous quarter, while UTI Bank’s NIMs fell from 3.1% to 2.7%. Interest expended as a percentage of interest earned was higher in the June quarter, compared to the March quarter, for Allahabad Bank, Corporation Bank and South Indian Bank.
Despite a slowdown in overall bank credit during the quarter, HDFC Bank and UTI Bank continue to have strong growth in advances, although growth slowed at Corporation Bank. The year-on-year rate of growth in net interest income varied from a high of 39% for UTI Bank to 14.6% for Corporation Bank.
Most banks have been able to show high rates of growth in non-interest income, Corporation Bank being the odd man out. Net profit growth, too, has been higher than operating profit growth for most banks as provisions have been lower.
One disquieting factor has been the sharp rise in expenses on account of employees—these rose by a huge 85.6% y-o-y for UTI Bank and 70.6% for HDFC Bank. For the larger private sector banks, wage inflation is a fact of life. Even IDBI’s wage bill went up by 36% y-o-y in the June quarter. However, in spite of the increase in the wage bill, HDFC Bank was able to lower its operating expenses to total income ratio, on a year-over-year basis, whereas UTI Bank’s ratio worsened. However, the immediate past is not a guide to the future. That’s because of several factors, the most important of which is lower deposit rates. Banks are flush with funds and the rates for wholesale deposits, such as corporate deposits, have fallen and banks are likely to revise their retail deposit rates too downwards. Credit growth is expected to pick up once the busy season gets under way while there is no pressure, at the moment, to revise loan rates downwards. No wonder the BSE Bankex continues to outperform the Sensex.
Write to us at marktomarket@livemint.com
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First Published: Thu, Jul 19 2007. 12 26 AM IST
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