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Weekly Insights #8- Biocon’s Market Cap = Syngene's. Value or Value Trap?

Recently I noticed something interesting, Biocon’s markecap is almost nearing Syngene’s marketcap; Biocon is trading at ~24,000 crores mcap and Syngene at ~23,000 crores mcap.


This is a very peculiar situation given that Syngene is a subsidiary of Biocon and only contributes a part of Biocon’s overall profits; and Biocon has other large businesses of Biologics and Generics-

  • Biologics business itself was valued at ~$8 billion (>Rs60,000 crores) in recent Viatris deal and Biocon holds ~68% stake in this business.

  • Generics business historically has generated annual profits of ~Rs250-300 crores and should easily be worth over Rs5000 crores.


Syngene currently contributes less than 50% of company’s overall profits, and this contribution will further reduce as the Biologics business will see meaningful improvement in its contribution on the back of recent Viatris acquisition & Serum Deal.


So why such divergence in valuations?


The first possible explanation that comes to the mind of most investors is the concept of holding company discount.


Biocon holds partial stake in Syngene (~55%) & Biocon Biologics (~68%). The equity value of these stakes itself is ~Rs55,000 crores. Adding the value of generics business, the entire business should command a value ~Rs60,000 crores.


(Syngene- Rs23000 * 55%) (Biocon Biologics- $8 billion * 68%)


Considering the current market cap of Biocon of ~Rs24,000 crores the discount is ~60% which is very high, especially when we consider the fact that Biocon is not a pure holding company, it has standalone business operations as well.


(Typically, pure holding companies/investment companies receives the highest holding company discount while lower discount is given to companies with business operations)


So just the holding company principle does not explain this valuation gap.


One major factor that seems to be in play here is that, generally in situations wherein a company has multiple business lines, the market typically values the entire company based on the poor business’s valuation metrics. For market, combination of a good business & a bad business is still a near bad business.


(Unless the poor business is a very small portion of overall business & is not a drag on the overall business)


In case of Biocon, on one hand we have a good business of Syngene with good secularity & resilience and thus is valued at premium valuations of ~25x EV/EBITDA. While on the other hand we have the Generics business which is generally valued at low teens to high single digit EV/EBITDA multiple.


And then we have the Biologics business which holds the major underlying value for Biocon and would increasingly represent a larger part of Biocon’s overall profits.


But in the Biologics business, Biocon’s execution has been poor. Biocon had the first mover advantage in the biosimilars space wherein it was among the very few companies (max 2-3 player) to have biosimilars launched on a particular Biologic; with each product’s end market opportunity being in excess of atleast $1 billion. In some products it was even the first company to launch a biosimilar equivalent of a biologic.


Still Biocon was not able to gain meaningful market share in these products. In some products players who launched after Biocon were able to get a much larger market share in these products. Further, it has been facing regulatory challenges in getting some products to market, as a result of which it has lost that first mover advantage in these products.


Because of this poor execution & some bit due to evolving business dynamics of biosimilars (becoming increasingly competitive), market is not ascribing good valuation multiples to this business. Most sell side reports are valuing the Biologics business at low teens EV/EBITDA multiples.


And because major part of Biocon’s overall business (Biologics+Generics) is being valued at lower multiples, even the stake in Syngene is being valued lower than what it should be.


Biocon as a whole is currently valued at low teens EV/EBITDA multiples.


In summary there is valuation gap for sure, but there are reasons for it. Value unlocking should happen here once market sees the progression in the Biologics business.


Next few quarters are important for Biocon as the biosimilars business would realize the full benefits of recent Viatris acquisition and Serum vaccines deal. And maybe that acts as a trigger for market to ascribe higher valuation multiple to the biologics business; and that will have a compounding effect on how the other businesses are valued at a consolidated Biocon level.



That’s it for this week, new insight coming up next week. So stayed tuned!



 

Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.


“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”


“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”


“The securities quoted are for illustration only and are not recommendatory”



Stock specific investment disclosure:

Biocon- No Investment. Not Traded in last 30 days. Not an active recommendation in Research Service.

Syngene- Invested. Not Traded in last 30 days. Active recommendation in Research Service.


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