Biocon bucks the trend

The share has performed well on the boursesn terms of sales and operational efficiency

Biocon Ltd has been one of the few scrips that has stood up well against the market volatility. This scrip has been steady at around Rs 520, in contrast to the approximate one per cent decline in the BSE's healthcare index in the last 7 days. The company's results for FY 2004 show why.

Riding on the back of a 98 per cent growth in net sales to Rs 501.88 crore, net profit has grown 247 per cent to Rs 124.67 crore, slightly higher than analysts' estimates.

Overall operating profit margins rose 146 per cent to Rs 153.7 crore in FY04 and operating profit margins rose 600 basis points to per 30.6 cent.

The main reason for the excellent performance has been rapid growth in the company's pharmaceuticals division, due to an upsurge in the demand for active pharmaceutical ingredients or APIs for statins (cholesterol lowering drugs).

Statins accounted for approximately 55 per cent of total revenue in FY04. Pharmaceutical segment revenue rose 117 per cent to Rs 435.36 crore in FY04 helping segment profitability rise 118 per cent to Rs 177.33 crore, while segment operating profit margin rose 30 basis points to 40.7 per cent.

The company's enzyme division has performed better due to an upsurge in demand from both global and Indian user industries such as leather, food & beverage, and textile and clothing.

Higher sales volume helped segment profitability rise 21 per cent to Rs 28.15 crore in FY04 and segment profit margins rose 68 basis points to 40.15 per cent.

The company has received US FDA's approval for its pravastatin, simvastatin, lovastatin and pioglitazone manufacturing facilities.

Going forward, this approval gives Biocon access to the American market for these products which is valued at $6 billion and slated to go off-patent in 2006.

In addition, Biocon has entered into an agreement to supply recombinant human insulin in bulk form to Bristol Myers Squibb Co.

The contract is for a period of nine years and these measures should help the company aggressively expand its exports which amounted to Rs 339.5 crore in FY04.

The proceeds of the company's recent IPO would be used to finance the company's estimated Rs 650 crore expansion plan. A key focus of this plan is that the facility for producing active pharmaceutical ingredients or APIs for statins will be expanded by a factor of four.

Near-term growth estimates are certainly bullish considering that many drugs in this segment will be off patent from 2005.

Tata Motors in Overdrive

Tata Motors has had another great year. Sales grew 45.4 per cent last fiscal, and profit before exceptionals and taxes jumped 160 per cent.

What's more, at a time when most auto manufacturers are struggling with higher raw material prices, Tata Motors reported a 170 basis points jump in operating margin.

The other reasons for the jump in profit were higher non-operating income and a 42.2 per cent cut in net interest cost.

The pertinent question is whether the company can produce similar results for the third year running. Tata Motors seems rather confident, if one were to go by the aggressive capex plans it has laid out. It plans to spend Rs 1,200 on capex per year for the next five years.

Even in the 1990s, when the company aggressively added capacity, capex was in the region of Rs 800-900 crore. By the end of this year, the company plans to increase the capacity of its car manufacturing unit by 50 per cent. Importantly, both the Indica and Indigo now have a waiting list because of capacity constraints.

The increase in capacity will obviously help in meeting the latent demand for its products. Analysts estimate double-digit growth in the region of 20 per cent for cars in the next two years.

For Tata Motors to participate in this growth, an expansion in capacity was imperative simply because it's operating at near full utilisation.

The commercial vehicles segment grew 44 per cent in volumes last year, and has been the primary driver of revenue growth for the company. Going by sales figures in recent months, there are no signs of a slow down.

But the company itself is rather cautious on this front. It is already at 70 per cent capacity utilisation and growth like that in the last year will lead to capacity constraints soon. But there are no plans to increase capacity in the near term.

Analysts feel that because of a high base, growth numbers may taper. But the division is expected to grow, nevertheless, thanks to the highway development projects.

What's more, the new higher tonne vehicles are much more efficient for operators, triggering replacement demand as well. Last year, for instance, operational economics for operators was almost the same despite a 9 per cent jump in diesel prices.

While the outlook, at least for this year, is good, the stock has fallen around 25 per cent from the highs reached earlier in the year and trades at just around 14 times FY05 earnings.

Wwith contributions from Mobis Philipose & Amriteshwar Mathur