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Biocon at a strong reversal zone. Definitely worth the risk!!

Biocon Ltd

Biocon is India’s largest biopharmaceutical company. The company mainly operates under 4 verticals- Biologics (32% of revenue), Small molecules (31% of revenue), Branded formulations (9% of revenue) and Research services (28% of revenue). In the last fiscal, the company reported a top line growth of 34% yoy. While operating profits jumped by 82%yoy and profit more than doubled (of a lower base in FY18). Their operating and PAT margins improved to 22%yoy and 15% yoy respectively. The management believes that these margins are sustainable.

In Q1FY20, revenue increased by 30% yoy mainly due to growth in their biologics business. Their small molecules business also benefitted from API sales on account of immune-suppressants and continued growth of generics in the US markets. Their Operating profits and PAT increased by 81%yoy and 72% yoy respectively. While thie operating profit margins have improved from 21% in Q1FY19 to 29% in Q1FY20.

The company has undertaken a Greenfield project of Rs. 600 crores for fermentation based manufacturing at Visakhapatnam, Andhra Pradesh to cater to the anticipated volume growth in the small molecules APIs and generic formulations business

Since the past few quarters, it is their biologics business that has been driving growth. Revenue from biologics has practically doubled from Rs. 250 crores in Q1FY19 to Rs. 490 crores in Q1FY20. This has led to an expansion in their EBIT margin ( from 12%in Q1FY19 to 21% in Q1FY20). The company separated the biologics business into a subsidiary in 2016 and is planning to get it listed as a separate entity in the future. At present, the company is searching for funds for capex and R&D activities in this sector before its listing

Going forward, The management expects the second half of FY20 to be stronger and the overall revenue growth momentum in biologics segment to continue in FY20 largely driven by new launches and increase in the market share of existing products. Syngene’s (Biocon’s contract research organization arm) new R&D facility at Hyderabad will be commissioned in 2QFY20. These biosimilar launches and Syngene’s performances will continue to be key levers for the company.

Technical View

After correcting 40 percent from the highs, this stock is finally giving some early signs of reversal on the monthly charts. The stock has come down to the Fibonacci confluence zone of 214- 220.90 levels. In the same zone we also have a bull candle in the past which further supports the strength of the zone. At the confluence zone RSI is also in the bull zone of 40. The oscillation of the RSI between 80-40 continues to indicate that the stock is in a strong bull trend. The trend line support in the same zone further makes the case for a strong support and a reversal from the zone. A support on the horizontal and the diagonal is considered a strong support technically. Therefore both momentum and price are in their strength zone which makes a strong case for a buy. The first major resistance for the counter will come at 270 levels and then at 298 levels. This view is definitely for a longer term perspective. Traders can keep buying the dips in the counter.

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