Aurobindo Pharma


(Subash Nayak) #1

Recently, bunch of well respected research houses have came up with buy rating on Aurobindo Pharma. Creating a new thread, so that we can track it effectively.

From IndiaNivesh

http://www.indianivesh.in/Research/ViewResearch.aspx?id=1

Indianivesh who knows pharma sector very well turns positive with a target of 343.

Positive surprise on margins front, sustainability likely, maintain

BUY &revisetarget price upward from Rs 252 to Rs 343

Robust growth from USA (+53% y-o-y in USD term), higher contribution from

formulation business, and better product mix lead to substantial improvement in

margins of the company. Aurobindoas revenue grew ~28% y-o-y (11.6% q-o-q) to

Rs 18,970 mn (V/s INSPL est=Rs 19,940 mn) slightly below our estimates but better

than consensus. EBITDA margins increased ~620 bps y-o-y to 23.1% level (V/s INSPL

est 18.4%) & EBITDA grew 75% y-o-y to Rs 4,384 (V/s INSPL est= Rs 3,674 mn).

Adjusting forforex losses of Rs 683 mn in Q2FY14 V/s forex gain of 1,177 mn in

Q2FY13, net profit grew 189% y-o-y to Rs 3,022 mn (V/s INSPL est= Rs 2,135 mn).

Healthy revenue growth across the segments & geographies:

Companyas revenue increased ~28% y-o-y (11.6% q-o-q) to Rs 1,897 mn (V/s INSPL

estimates = Rs 1,954 mn) in Q2FY14. Formulation business (Excluding ARVs) grew

53% y-o-y to Rs 9,952 mn (contributed 51% of total revenue in Q2FY14 V/s 42.3% of

total revenue in Q2FY13) on the back of 72% y-o-y growth from US business (~53%

in USD term) & 17% y-o-y growth in European & RoW business. However, ARV

formulations (contributed 11.9% of total revenue) declined 7.6% y-o-y to Rs 2,331

mn mainly on higher base. Growth in API business was relatively lower compared

to Formulation business and contributed 36.8% of revenue in Q2FY14 compared to

40.5% of revenue in Q2FY13. API business grew ~15.4% y-o-y to Rs 7,180 mn on the

back of ~32% y-o-y growth in SSPs & ~27% y-o-y growth in ARV & others, partially

offset by ~8.3% decline in Cephs business. Company reported dossier income of

Rs 63 mn in Q2FY14 compared to Rs 117 mn in Q2FY13. (See the table given below).

Valuations:

During the quarter positive surprise was from the margins front but we believe

that companyas investment in its subsidiaries to expand front ended teams has

started paying dividends and likely to be sustainable. Its most of subsidiaries are

turning break even or higher EBITDA positive. Additionally, favorable product mix is

likely to be positive for gross margins also. In our view, considering robust

performance of the company in the last few quarters & promising outlook, re-rating

of the stock seems on the cards. We continue to maintain strong BUY on the stock

& increase target price from Rs 252 to Rs 343, valuing at 10x of FY15E. (Earlier

valued at 9x of FY15E).

At CMP of Rs 260, the stock is trading at P/E multiple of 10.4x of FY14E &7.6x of

FY15E earnings estimates.


Hitesh portfolio
(Subash Nayak) #2

Copying Vivekji’s comment**
**

EDELWEISS TOO GIVES A BUY RATING FOR AUROBINDO WITH A TARGET OF 343

Aurobindo Pharmaâs (ARBP) Q2FY14 adjusted PAT of INR2.88bn (up 68%

QoQ) was significantly ahead of our INR1.76bn estimate. The

outperformance was due to robust US growth (53% YoY in constant

currency), improved realisations from favourable currency and operating

leverage. While revenue growth of 27.6% was in line, EBITDA margin at

22.9% expanded 620bps YoY. The expected scale up in injectibles and

controlled substances in US and recovery in Cephalosporin (Unit-VI) are

likely to yield stronger H2FY14. We thus expect margin to sustain at 19-

20% for FY14/15E and hence raise our FY14E and FY15E EPS from INR22

and INR28 per share to INR29 and INR34 per share, respectively. Our

revised TP of INR343 (INR280 earlier) is based on 10x FY15E EPS. We

believe sustainable operational performance will restore confidence over

execution, resulting in valuation rerating. Reiterate âBUYâ.

Robust outlook on back of strong US pipeline

US generics, which contributes ~58% to formulations, is a key growth driver. ARBP has

157 pending approvals, of which ~50% are in injectibles and controlled substances.

Management plans to scale up these businesses significantly over H2FY14 with launch

of four controlled substance products (addressable market USD3bn) and three

injectibles (currently in shortage). Moreover, it expects to gain additional USD15mn

sales from resupply of Cephalosporins during the same period.

Building injectibles franchise in US

ARBP has identified injectibles as key focus area and is investing upfront to build a

strong pipeline of 100 ANDAs from current 42. It has completed acquisition of Celon to

accelerate growth in hormones/oncology injectibles. It expects to file 22 products from

the acquired site. These assets will render higher growth and margin over FY16/17

Outlook and valuations: Strong earnings upside; reiterate âBUYâ

We expect 50% earnings CAGR over FY13-15E as investments peak and strong traction

from US pipeline offers positive operating leverage. Management has guided for

sustainable margins with stronger H2FY14. ARBP has repaid USD65mn debt YTD which

allays investor concerns. We maintain âBUY/SOâ recommendation/rating on the stock

Financials (Consolidated) (INR mn)

Year to March Q2FY14 Q2FY13 % change Q1FY14 % change FY13 FY14E FY15E

Net revenue 19,139 15,004 27.6 17,156 11.6 58,553 7 5,958 8 7,168

EBITDA 4,384 2,503 75.1 3,077 42.5 8,891 1 5,093 1 7,225

Adj. net profit 2,882 1,334 116.0 1,714 68.2 4,213 8 ,401 9 ,978

Adj. Dil. EPS (INR) 9.9 4.6 5.9 1 4.5 2 8.9 3 4.3

Diluted P/E (x)-core 20.8 9.0 7 .5

Core EV/EBITDA (x) 12.2 7.0 5 .9

ROAE(%) 18.5 2 7.7 2 5.8


(Subash Nayak) #3

Copying Vivekji’s comment**
**

HDFC SEC also gives a buy call to Aurobindo with a target of 348

Still attractive Aurobindo Pharma (ARBP) has witnessed consistent

improvement in its revenue/margin over the last six

quarters driven by resolution of USFDA compliance

issues, better product mix in the US and de-focus on

low margin ARV tenders. Revenues have grown at

20% coupled with impressive margin improvement

(from 11.5% in 1QFY13 to 22.9% in 2QFY14).

Going ahead we expect the traction in revenues to

continue as its product pipeline materializes. ARPB

has strategically built pipeline for the next 5-6 years

targeting the US market. While the first leg of

growth will be driven by injectables and controlled

substance products (through increased filings), the

second leg of growth would be led by peptides and

oncology injectables driven by acquisition (acquired

Celon Labs). High debt (~Rs34bn) continues to be a

concern, but improving free cash flow generation

and better return ratios (RoCE up from 9.5% in FY13

to 15.4% in FY15E) gives comfort.

At CMP, ARBP trades at mere 7.5x FY15E EPS,

making it one of the attractive companies from a

relative valuation perspective.

i Robust 2QFY14 : ARBP posted strong revenue

growth of 28% at Rs 19.1bn, EBIDTA margin at

22.9% expanded 620bps YoY aided by better

realization and product mix. APAT came in at Rs

2.93bn, up 124% YoY.

i US a key driver : Post witnessing a rough time for its

US business with two units under FDA import alert,

ARPB has made a strong comeback this fiscal driven

by FDA resolution and new launches. Continued

launches in niche segments would lead to 31% (in Rs

terms) CAGR over FY13-15E.

i Margins to remain steady : Though current

quarter margins are mainly driven by better

realizations, we expect ARBPas margins to be

consistent at 20%+ levels in FY14/15E led by niche

product launches and improving operating leverage

(current capacity utilization at ~70%).

i Valuation : We believe ARBP holds immense value

at current levels given its robust visibility in

revenue/PAT (21/55% CAGR over FY13-15E) and

improved visibility beyond FY15E. We value ARBP at

10x FY15E EPS and recommend BUY with a TP of Rs 348

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/2998831


(Ankit Gupta) #4

I used to own this stock around 1.5 years back (However, at that time I never used to dig deep into the company like I do now). There have been corporate governance issues in the company with tax raids being coducted at its offices. Also, there were issues related to political links of the promoters. In addition, debt seems to be on higher side.


(Subash Nayak) #5

Note to myself:

Need to update this thread with proper SWOT analysis, so that it confirms valuepickr standard.


(Vivek Gautam) #6

Flurry of reratings continue . Angel, Fortune ,Edelweiss,JM all up their target for Aurobindo

A sensible analysis from BS highlighting

)- Specially the injectibles performance where there is severe shortage now in US,

-Investment made in US Market earlier now bearing fruit

)- Operating leverage comes into play

)- USFDA removes its objections now

)- Valn attractive now with expected EPS of 30 & 37 for march 14 & 15

)- Opp size remains big

But risk is promoter YSR & Hyd connections

http://smartinvestor.business-standard.com/market/Marketnews-209654-Marketnewsdet-Aurobindo_Pharma_Out_of_the_woods.htm#.UoIiyXBHKyp

IT & Pharma n other export stories remains in sweet spot with rupee depreciation again gathering pace,

Discl- Recently entered in scrip


(Sourabh Agarwal) #7

IT & Pharma n other export stories remains in sweet spot with rupee depreciation again gathering pace,

just a note -Aurobindo has dollar denominated debt and it will not benefit from falling rupee .If dollar appreciates then it will show forex loss (mtm for debt ).It has happened in the last quarter where the forex loss ate all the profits .

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http://smartinvestor.business-standard.com/market/Marketnews-209654-Marketnewsdet-Aurobindo_Pharma_Out_of_the_woods.htm#.UoIiyXBHKyp Link: http://smartinvestor.business-standard.com/market/Marketnews-209654-Marketnewsdet-Aurobindo_Pharma_Out_of_the_woods.htm#.UoIiyXBHKyp


(Subash Nayak) #8

Flurry of re-rating of Aurobindo pharma by various brokerage house

Brokerage

Date

EPS FY14E

EPS FY15E

Target Price

Fortune Equity

11-11-2013

30.9

37.7

377 (from 266)

Angel Broking

11-11-2013

362

HDFC

11-11-2013

29.8

34.8

348 (from 260)

Edelwiess

29

34

343 (from 280)

IndiaNivesh

23-11-2013

24.9

34.3

343 (from 252)

BoAML

29-11-2013

30.55

38.24

425


(Raj Panda) #9

Hi subash,

In the past you have had strong views on companies which have shares pledged.

Whats’s your take on auro pharma from that angle ? They have ~21% of promoters holding pledged.


(Vivek Gautam) #10

Auro has never diluted equity which is constant at 29 Cr although the turnover is now 7500 Cr. hence they had to take debt including through pledged share route n that too only 21%. They are very comfortable in servicing the debt thanks to increasing sales n investment phase over nnoperatingnleverage coming into play. I have never heard of them selling pledged share .


(Subash Nayak) #11

Finally was able to complete a small write-up (a very brief one) on Aurobindo Pharma. Sharing the same. Please go through it and give me feedback.


(Subash Nayak) #12

Sorry, File size exceeded 100KB limit. Sharing google drive link (google account login will be needed)

https://docs.google.com/file/d/0B6ytclmVNCY3Sm91empadFJTRFU/edit


(Sunil) #13

The management of this company seems suspect. Most of them have political links and have been involved in some financial irregularities in past.


(anil) #14

Subash,

You can add ventura securities and reliance securities as well in that list of yours. They have recently initiated/re-initiated their coverage for aurobindo and are very optimistic regarding auro’s furutre prospects and pipeline of drugs.


(Subash Nayak) #15

Hi iAmSunil,

Old management political link is a known fact. Now auro has a new management. The old ones are send off to USA for looking after the US business.

Hi anil,

I have added extracts of Ventura/Axis-Cap report on Aurobindo. Dont have reliance security report on aurobindo capital. Please mail me it at subash[dot]nayak[at]gmail[dot]com

https://docs.google.com/file/d/0B6ytclmVNCY3Sm91empadFJTRFU/edit


(Sourabh Agarwal) #16

Aurobindo pharma acquires actavis .

http://www.moneycontrol.com/stocks/reports/aurobindo-pharm-aurobindo’s-european-subsidiary-signs-binding-offer-to-acquire-commercial-operationsseven-western-european-countriesacta-757835.html

From various articles and further research it comes out that Actavis was desperate to sell these units which they got as part of their merger with Watson. Since they were loss making for Actavis, the valuations are expected to be cheap for Auro…And with Auro becoming a strategic supplier to Actavis as part of this deal, it does look like a big game changer for Auro which can catapult them ahead of DRL and others in the European market. With US also doing very well for Auro, it seems Auro has set their focus right in going big in Europe with this acquisition, the same way Lupin did when they ventured into the Japan market.

Lastly, I reiterate once again that Mylan bought Agila for their injectables portfolio for 1.8 Bn USD. Auro will have their injectables business as a formal subsidiary by the name of Curepro post 27th Jan court convened meeting. Let`s wait to hear if they are roping in a financial or strategic partner into this new company with 25% share which has been left unsubscribed as part of the demerger. A very well thought out strategic plan is surely in place and should benefit Auro investors hugely in the long run. In the shorter term it can go anyway till such time the deal contours are not known

Disc-Invested


(Vivek Gautam) #17

Good cogent analysis. Aurobindo seems to have got these cos very cheap at Euro 30 million.

The co is being rerated n has some very savvy investors like RJ,Madhu Kela, RK Damani, Ramesh Damani invested in it substantially.


(Sourabh Agarwal) #18

Agreed that aurobindo got this cheap .The acquired company is doing sales of 300 m euro but it is loss making .We may expect a short term blip in the consolidated results and operating margins may take a hit .

It is the operational costs which will increase for Auro till such time they are able to integrate the same with their Indian operations. Hence EBITDA margins which were rising could take a beating for some time. This in turn could impact bottom line though sales will increase manifold. As European operations for Auro were just breaking even in q2 in 3 of the 7 countries, this acquisition will put it back in losses for the near term.
The good thing is they have the management bandwidth to handle this with Arvind, Muralidharan and Govindrajan etc. who are key operational folks with loads of experience doing such deals. A big positive in that context for Auro.

This year FY 14 they will be 7000 crores plus. Say 20% growth over FY 14 and it will be 8500 crores. Add 320 Mn USD which is 2000 crores and we will have a turnover of 10,500 crores plus in FY 15 and a 15% growth on that will make it a 2 Bn USD company in FY 16 for Auro. In line with their stated goal

Even a 15% EBITDA will give it 300 Mn or 2000 crores for FY 16. Post taxes and interest costs, we should have a net profit of 1400 crores which will give it an EPS of nearly 50 for FY 16. Even at a modest multiple of 20 given the size and scale, we can see a 4 digit share price for Auro in 2 years time. Add the injectables portfolio to this and you will see this valuation at the lower end…the more I look into this, the more convinced I am about its future


(Vivek Gautam) #19

Also they have left behind Indian cos like Lupin, Dr Reddy n others in capturing the pole position in Recently launched generic version of Cymbalta .

Any updates on launch n dates of similar other opportunities in generic space for Aurobindo?


(Hemant V Bhatia) #20

Highlights of the Call by Capital Mkt:

The Company made an announcement to enter into a Binding agreement through its European Subsidiary to acquire Actavis’s Western European Operations in 7 Countries.

Aurobindo expects to acquire personnel, commercial infrastructure, products, marketing authorizations and dossier license rights in seven European countries. Actavis and Aurobindo will be entering into a long term commercial and supply arrangement in order to support the ongoing growth plans of these businesses. The acquisition expands Aurobindo’s front-end operations into five segments (generics, prescription products, over-the-counter products, hospital products and generics tenders) with approximately 1200 products and an additional pipeline of over 200 products.

The Management estimates the net sales for the acquired businesses would be around EUR 320 million in 2013 with a growth rate of over 10% year-on-year. Although these businesses are currently loss-making, it expects them to return to profitability in combination with its vertically integrated platform and existing commercial infrastructure.

The Actavis making EBIDTA loss of Euro 20 million and expects the break even for this business in the Second year. The largest of revenue contribution are from generics followed by hospital and tender businesses.

The business is loss making because they are in expansion mode and Europe needs some minimum size of infrastructure and revenue. Also, there is high COGS base in certain area and will turn to profit as it scale ups. The product mix and COGS are the major drivers going forward.

The Gross margins are at 30% and can move up to the 40 to 45% going forward. The potential of the margin driver’s are improving product mix, using common products as base and the site transfers.

The acquisition will enable Aurobindo to achieve critical mass in Western Europe with a top 10 positions in several key markets.

It establishes a strong foothold into France (through the âArrow Generiques’ brand) and complements European operations through front-end capabilities in Germany, Spain, Portugal, Netherlands, Italy and Belgium.

The Company will leverage its industry leading manufacturing economies of scale and ability to source lower cost APIs to significantly improve profitability of the business in the coming several years

The Total consideration is expected to be around EUR 30 million and will depend upon the Cash and Net Working Capital position at closing. It plans to fund the acquisition through internal accruals

The Closing of the transaction is conditional on certain antitrust approvals and completion of employee consultation processes.

The target businesses’ European infrastructure is highly complementary to Aurobindo’s. The Company’s vertically integrated platform provides the target businesses with a unique opportunity to materially lower COGS and enable its return to profitability.

The target businesses provide a readymade hospital sales infrastructure to launch its own injectable and specialty portfolio’s across Western Europe.

The Belgium market only with branded products of innovator products and not it is focusing on developing on other products.

The France and Germany are large and critical high value markets. The German turned to tender market and in France some initiatives started for the price control. The AuroGenerics is reputed across the market and strong presence in the Hospitals in the France will counter the pricing impact.

The Share from French market is less than half of the total revenues, primarily retail market with hospital business (Hospital 30% of the revenue).

The acquisition will benefit in terms of the large market access, hospitals and getting advantage of the new portfolios of oncology and inhalers and multiple new therapeutic areas.

The transactions will not add an additional debt profile and will be funded through internal accruals. The debt obligations were repaid as per schedule and not impacted by the current transaction.

On steady basis, these markets will have debtor days 60-90 days and inventory around 3-4 months.