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SANJAY CHHABRIA's WEEKLY STOCK IDEA(S) -20^th August 2007

Vol IV No 49

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"Remember, it's better to learn from other people's mistakes as much as possible".-Warren Buffett

"If principles can become dated, they're not principles". -Warren Buffett

"When proper temperament joins with proper intellectual framework, then you get rational behavior". -Warren Buffett

This Week's Stock Idea(s)- GlaxoSmithkline Consumer Healthcare Ltd(Rs 595) & Biocon Ltd(Rs 428)

Given the current market conditions, Investors would do well to accumulate gradually on declines.

GlaxoSmithKline Consumer Healthcare Ltd(Rs 595)(BSE Code- 500676 NSE Code-GSKCONS)- GlaxoSmithKline Consumer Healthcare (GSKCH) is an Indian associate of GlaxoSmithKline plc UK, (which holds a 43% equity stake). GSKCH is one of the largest players in the health food drinks industry in India. The company, with its manufacturing plants located in Nabha, Rajahmundry and Sonepat, has a workforce of over 2,700. GSKCH's flagship product Horlicks is a widely regarded and highly respected brand, present in India for over 100 years. GSKCH dominates the Rs 1300 cr. Indian malted beverage market with a significant 65% share (volume terms). Its white beverage brand `Horlicks' has led the market growth of this sector in India and contributes around 80% to the company's revenues. The company also manufactures and markets Boost, Viva, Maltova, Biscuits and in addition promotes and distributes a number of products in diverse categories, including prominent brands such as Eno, Crocin and Iodex. With a strong marketing and distribution network comprising over 1,800 wholesalers and direct coverage of over 4,00,000 retail outlets, GSKCH has a market share of around 70% of the health beverage market.

Innovation continues to be the focal point in GSKCH `s manufacturing, sales, marketing and various brand-building efforts. Increased health consciousness within the stressful urban lifestyle offers encouraging opportunities for science-based nutritional products. GSKCH's global standard, state-of-the-art R&D center, has enabled the R&D team to enhance the size of the portfolio it can handle and help meet its goal of increasing the contribution of sales from new products. In the past 36 months, GSKCH has unveiled many new products, leveraging the health platform

GSKCH sales for the Q2 ended June 2007 increased by 18% to Rs 315.60 cr. compared to the corresponding period of previous year. The rise was on the strength of double-digit growth registered by the company's flagship brands Horlicks & Boost and aggressive sales strategy. The brands grew by 18% in value terms. Boost registered a strong growth of 20% in volume terms. The company's Chocolate Horlicks drove the performance with a large-scale sampling and an excellent tie-up with Hollywood movie Spiderman-3. As such, operating profit margin of the company increased by 130 basis points to 18.5%. The resulted net profit of the company grew by 37% to Rs 42.30 cr. For half year ended June 07, the company's sales increased by 18% to Rs 642.10 cr. and net profit increased by 29% to Rs 84.60 cr.. Based on half yearly results, the company is likely to post an EPS of Rs 37- Rs 38 for the year ending Dec. 2007. For the year ended Dec. 2006, GSKCH had posted net sales of Rs 1111.9 cr.(up 15%) and net profit of Rs 126.9 cr.(up 18%)

Going forward the company expects its brands such as Horlicks and Boost to lead the growth and it will continue to invest aggressively in these brands. India is also a high potential market and as announced earlier, its programme of targeted acquisitions of nutritional brands remains firmly on track. The next-best alternative to the acquisitions not materialising is buyback of shares. The company's surplus cash is likely to increase to Rs 350 cr. by end-CY07

GSKCH is also planning to expand its reach over a period as it sees its products as health-drink alternatives. Globally, the company has several health supplements and products which hold relevance for the Indian market. The management is looking at launching them in India. Besides the launch of a new category by end-CY07, the company is actively scouting for acquisitions. The company aims to acquire nutritional and over-the-counter medicinal brands, technologies and businesses. The launch, which is likely to be in the health food segment, would be in a different format and could develop into a big category going forward. Further, GSKCH is expected to introduce some of its global portfolio brands in India. On a equity of Rs 42.06 cr, the CY07 (E), EPS works out to Rs 37-38. The share price trades at Rs 595. PE works out to just 15.8. This is low for GSKCH, which has a commanding market share and solid growth prospects. Investors can accumulate the GSKCH stock at this level and add more on declines in the range of Rs 550- Rs 575 for a price target of Rs 825-Rs 850 in the medium-long term.

Biocon Ltd(Rs 428)(Rs 5 paid up)(BSE Code- 532523 NSE Code-BIOCON)- Biocon is India's largest biotechnology company with presence in biopharmaceuticals, enzymes, custom research and clinical research. It started as an enzymes (organic chemicals used in fermentation process) manufacturer and leveraged its expertise in fermentation to evolve into an integrated biopharmaceutical company with strengths in microbial techniques, manufacturing and marketing. The company has two subsidiaries - Syngene and Clinigene - which are involved in custom research and clinical research respectively. These subsidiaries contribute over 14% to the total consolidated revenues of the company (as per FY07 numbers). In July 2007, Biocon announced the sale of its enzymes business to Novozymes in a bid to focus on its core businesses of biopharmaceuticals and contract research. With successful initiatives in clinical development, bioprocessing and global marketing, Biocon delivers products and solutions to partners and customers across the globe. Many of these products have USFDA and EMEA acceptance. Biocon launched the world's first recombinant human insulin, INSUGEN® in November 2004 using Pichia expression and India's first indigenously produced monoclonal antibody BIOMAb- EGFRTM.

Sales for the Q1 ended June 07 grew by an impressive 28% to Rs 271 cr.. Biopharmaceuticals and contract research sales increased by 28% to Rs 206 cr. and 52% to Rs 44 cr. respectively. However, Enzymes sales declined by 5% to Rs 21 cr.. Operating margin expanded by a healthy 250 bps to 28% catapulting operating profit to increase by 41% to Rs 76 cr. and net profit increased by 36% to Rs 53 cr. The highlight of the quarter was the sharp improvement in gross margin driven by licensing income (US$ 3.5 million), higher contribution from insulin, and a 52% growth in the high-margin syngene/clinigene operations. Statins account for about a third of the business. The company has been reducing its dependency on statins quarter on quarter. The company's product `BIOMAb EGFR' for the treatment of head and neck cancers, which was launched in the domestic market in FY07 and its insulin brand `Insugen' were the other contributors to the overall growth in the biopharmaceutical business. As far as alliances are concerned, during the quarter, Biocon entered into an exclusive licensing agreement with a global biopharmaceutical company to develop and market a biosimilar version of G-CSF (granulocyte-colony stimulating factor) in North America and the European Union. Under the terms of the agreement, Biocon will receive an upfront licensing fee and once approval is received in the licensed territories, the company will receive royalties from sales. Biocon also entered into an agreement with Invitrogen to market insulin to the global cell culture market .

For the year ended March 2007, Biocon's net sales stood at Rs 986 cr. witnessing a 25% growth. In terms of contribution to sales, revenues from the biopharmaceuticals and enzymes business grew 20% to Rs. 823 cr., contributing 83% to operating revenues in FY 2007. Revenues from Research Services and Licensing grew 63% to Rs. 163 cr. contributing 17% to operating revenues in FY 2007.OPM declined by 40bps to 28.7%. However, consequent operating profit spurted by 24% y-o-y to Rs 283 cr. and net profit amounted to Rs 200 cr., up by 15% y-o-y. On a equity of 50 cr.(Promoters'stake- 60% ) the EPS on a Rs 5 paid up share stood at Rs 20

After divesting its enzymes business vertical to Novozymes for US$ 115 million, Biocon will focus on its core bio-pharmaceuticals business. This deal is a very favourable for the company as it releases huge funds from a business which was not growing as expected. Biocon expects to use these proceeds for innovation-led businesses acquisitions in biopharma/custom research services and also products. Over the past couple of years, Biocon has invested over Rs 550 crore to expand its fermentation and chemical synthesis infrastructure and plans to spend another Rs 250 crore in future. The full benefits of this expansion will continue to accrue in future. Biocon is also spending heavily on R&D. Its oral insulin program has successfully completed Phase I human clinical trials and will soon enter Phase II human clinical trials. This, in turn, will create new growth avenue for the long term. Biocon's strategy to increasingly focus on insulin, immunosuppressants, branded formulations and monoclonal antibodies in a bid to reduce its dependence on statins will be critical to drive growth in the future. In FY 2008, Biocon can be expected to post sales and net profit of Rs 1125 cr. and Rs 240 crore, respectively. On an equity of Rs 50 crore and face value of Rs 10 per share, EPS works out to Rs 24. At the current price of Rs 428, P/E works out to 17.8. Investors can accumulate the Biocon stock at this level and add more on eclines in the range of Rs 385- Rs 425 for a price target of Rs 550-Rs 575 in the medium-long term.

Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh). At the time of writing this, he doesn't have any position in the stocks mentioned above. He welcomes comments, feedback & investor queries at valueinv@sify.com . The above report is based on fundamental research and analysis and is meant for investors, who want to invest with a medium to long-term perspective. It is not meant for short-term investors or traders. The name weekly stock idea(s ) does not mean that the stocks mentioned as buys in this report are for one week or short term. The name weekly stock Idea(s) only denotes the frequency of this report, which is weekly.

Disclaimer- Sanjay Chhabria (Author), does not accept any liability arising from the use of this report. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks. This report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments. Though all care is taken in preparing this report, subscribers are cautioned that prices of equity shares may rise or fall in a manner not foreseen. Subscribers and readers using the information contained herein are solely responsible for their actions and shall not hold the Author liable for any investment decisions/ actions based on the Content provided. Investment in stock market is risky and volatile