HSBC recommends ‘overweight’ rating on Biocon

MUMBAI : HSBC has recommended ‘Overweight’ rating on Biocon with a target price of Rs 270. The overweight recommendation is in view of low valuations and potential triggers in form of out-licensing of key NCEs in near-term. Biocon completed the Phase I comparative study of its leading biosimilar insulin glargine in type-1 diabetes patients with successful outcomes.

The company will start its Phase III program in US and EU now. Additionally, the psoriasis compound itolizumab phase III trial meets endpoints and the company is looking forward to receive approval in India. Itolizumab and oral insulin (IN-105) remain key licensable assets in NCE basket.

“We value the stock at 13x March 2014 EPS of 21.0 to derive our rounded target price of Rs 270. 13x is the valuation multiple that we use for mid-cap names like Biocon” said a note by HSBC. Historically these stocks have traded at discount of 30% to large -cap names like Dr Reddy's and Lupin. Currently, large -cap stocks are trading at 18x and the same discount of 30% applies to mid-caps including Biocon.

“Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for India stocks of 11%. At the time we set our target price, it implied a potential return above this band, hence our Overweight rating” report added. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.