Analysis of Biocon Ltd Results

When I first saw the FY11 Q1 results of Biocon, I was really disappointed. But on taking a closer look, there were some positives as well. Although the standalone net profit was down from Rs 72.3 crores to Rs 60.4 crores, their consolidated net profit from continuing operations (their subsidiary had sold its subsidiary) was marginally up by 7% from Rs 65.22 crore to Rs 70.05 crore. These figures indicate two important things:

1)    The domestic profitability has taken a hit
2)    The subsidiaries, many of whom are foreign, have turned profitable

Valuation of Biocon Ltd

Valuation of a company is not a straightforward task. There is no particular formula that will give a fixed value for the share of the company. I have tried using DCF (Discounted Cash Flow) method for valuing Biocon Ltd.

In the process of arriving at a particular value, several assumptions are required to be taken. I have tried to keep those assumptions as conservative as possible. The assumption for the same are as follows:

1) CAGR of Sales for the next 5 yrs: 25% (The past 5 yr average for Biocon is 28%, with growth touching 40% in the yr before last)

2) Target Operating Profit Margin of 20% (Past 5 yr avg for Biocon is over 25%. Most of the global players have the same closer to 30%)

3) Sales to capital ratio: 1.16 (Past 5 yr average for Biocon)

4) As the debt ratio of Biocon is very low (less than 0.1), for simplicity, I have taken the cost of capital as the cost of equity, which I obtained using the CAPM model.

5) The terminal value of the return on capital is assumed to be 15.5%. This is much lower than current ROIC of Biocon which is 22%

6) I have considered tax rate as 34% [as Biocon is a domestic company. This rate is supposed to further go down after implementation of the Direct Tax Code]

Considering the above mentioned assumptions, the final value I obtained for Biocon Share was Rs 435. The valuation depends a lot on the assumptions, but I believe the assumption that I have considered for the valuation of Biocon are conservative.

Excel sheet containing the calculation:  Biocon Valuation

If you have any comments, please shoot :)