It is well known that Porinju Veliyath has a soft-corner for stocks which are underdogs and are shunned by the market. Porinju’s belief is that such stocks are being shunned for irrelevant or irrational reasons and that mega gains can be harvested from them sooner or later.
Biocon, the mid-cap Pharma stock that Porinju recommended as his stock pick for 2016, is a textbook example of an underdog stock. Though the stock is in a sector which has produced mind-boggling multibaggers and is headed by a charismatic leader in Kiran Mazumdar, the stock has never caught the fancy of the market.
You can judge the extent of Biocon’s underperformance from the fact that in the period of 10 years from 30.12.2005, Biocon has given a return of only 136%. This works out to a CAGR of 8.97%.
In contrast, the S&P BSE Healthcare Index is up 415% in the same period (3008 to 15,520). Several of Biocon’s peers such as Sun Pharma, Lupin, Dr, Reddy, Ajanta Pharma etc have become super-duper multibagger large-cap stocks in the same period.
Porinju’s thesis for recommending Biocon is that it is now at an “inflection” point owing to its target to achieve $1 Billion revenue by FY19. He also opined that the stock would compound at a “reasonable” CAGR of 30-35%.
— CNBC-TV18 News (@CNBCTV18News) January 3, 2016
Now, Porinju is obviously using the term “reasonable” tongue-in-cheek because if a stock compounds at a magnificent rate of 30-35%, we are talking of a 5-Bagger in five years!
However, Porinju’s enthusiasm for Biocon is not shared by other analysts.
CLSA, the well-known foreign brokerage, has been repeatedly trashing Biocon. On an earlier occasion, when CLSA had issued a ‘sell’ call, it got attacked by Kiran Majumdar Shaw for an “illogical” report reflecting “poor understanding of huge opp for Biosimilars”.
CLSA "sell" report on Biocon is illogical n reflects poor understanding of huge opp for Biosimilars Axis has a "Buy" on Biocon on same .
— Kiran Mazumdar Shaw (@kiranshaw) January 6, 2016
When CLSA repeated the sell call a few days ago, Porinju mocked it.
— Porinju Veliyath (@porinju) April 28, 2016
It is notable that CLSA is not alone in its lack of confidence in Biocon. Motilal Oswal is also not impressed by Biocon’s performance and prospects. In a report dated 27th April 2016, Kumar Saurabh and Amey Chalke recommended a sell on the basis that “the earnings outlook for Biocon remain modest over FY17/18E (15% EPS CAGR as against ~20% for its peers), and big investment projects like the biosimilars/ Malaysia insulin plant are unlikely to generate significant revenue before FY18”. The duo has projected a target price of Rs. 490 for Biocon, which is a downside of about 20% from the CMP of Rs. 585.
Daljeet Kohli is also somewhat lukewarm about Biocon. He has recommended a ‘hold’ with a target price of Rs. 458. He stated “At CMP of Rs. 564, the stock is trading at 25.5x FY16E EPS of Rs21.8 and 21.7x FY17E EPS of Rs25. We have price target of Rs458 and HOLD rating, based on valuation.” Why Daljeet is recommending a ‘hold’ when his target price is lower is not clear.
Be that as it may, we have to keep a close watch on whether Biocon sheds its legacy of disappointing investors and delights them by fulfilling Porinju’s prophecy of a “30-35% CAGR compounding return”!