Aurobindo Pharma

It seems mutual funds holding is done under trustee with name of various schemes following it. Since the schemes can add up to be very long there is a truncation. Some mutual funds pool 5/10/20 schemes even if it shows up in share holding as one scheme. Like in Aurobindo’s case the annual report has SBI Magnum fund as holding 2.45% on 31.03.17 while the SHP says SBI Arbitrage opportunies fund owns 2.45%.

Bottom line is nothing to worry about.

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Any specific reason why Aurobindo is falling in price? I am a long term investor but I am just keen to understand if there is any fundamental issue.

The financials does not seem to indicate any issues.

Disclosure: Invested

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Whole of pharma should fall due to weakening USD. It’ll effect revenue of all those who export to the US.

Q3 2018. Decent set of numbers though lower than the street expectations.
8bd7149a-ef1f-4d1c-afec-2ba02812a822.pdf (821.9 KB)

AurobindoPharmaLimited.pdf (440.0 KB)

I can see commitment bias to be high in Pharmacy stocks. Aurobindo came with the best quarterly results for the last two quarters for all of pharma stocks. It also has the best chances to weather the turbulence for the next couple of years with highest ANDA filings. With debt under control and reducing every quarter, there is an option open for inorganic growth as well which Aurobindo Pharma has proven they are good at multiple times. Still the stock is quoting at much cheaper valuations compared to other pharma stocks. Good pick for value investors.

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Any reason or to be concerned with lower R&D spending by Aurobindo? For eg. Contrast that with Lupin. So, if you takeout the ~300Cr extra spending, Lupin should be valued ahead of Aurobindo? (that’s how I see it, old time followers of these companies might provide a better prespective)

Aurobindo: 2017 Full Year: 590Cr, Latest Quarter 157Cr R&D Spend.
Lupin: 2017 Full Year R&D: 2310Cr, Latest Quarter Rs. 475 Cr Spend.

That is a valid point. However in my opinion, high r&d spend may not necessarily mean higher income in the future as there are chances of r&d not bearing fruit. Take Glenmark for example, besides having very high R&D for a decade, they are not going anywhere at least as of now. In the commodified generic industry where R&D is not a big differentiator, I find Aurobindo to be goodpurely based on numbers. They still have the highest number of filings meaning high potential for future earnings. However, I am no expert in pharma market to comment on their R&D spend. Anyone with further knowledge please comment.

Is USFDA inspection really a thing to worry about in short term ? or Should we load onto it ?
Results and guidance are encouraging in otherwise bad environment. Can some seniors throw some light ?

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Well said. here is an article on Aurobindo Pharma with some details regarding their R&D Spend versus their competitors.

Given these facts, it is surprising that the company is available at low valuations despite decent performance in Q3. Or we are missing something, as Pharma industry is a bit complicated ?

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Hi, I have recently started research on Aurobindo Pharma.

I have two concerns closely related to one another and would love to be proven wrong as the stock is very interesting:

  1. Philip Fisher said in his book and I quote: "One thing an investor can be certain of is if a large company needs to bring in a new chief executive from the outside is a damning sign of something basically wrong with existing management, No matter how good the existing earning statement.”
    Isn’t it a Red flag that N. Govindarajan was appointed as Chief Executive from outside and no one from existing management was deemed suitable for the job?

  2. The management who were replaced during the Jagan scandal in 2012 - K Nityananda Reddy and P V Ramprasad Reddy are still on the board. Are we sure then about the integrity and ethics in current Board Members?

Also, the company claimed it did not replace the board members due to the scam, firstly, why not? Secondly, they allege it was a pre-planned restructuring, which sounds dishonest.

Any insight into the above-mentioned concerns would be greatly appreciated. Thanks in Advance.

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Is it very hard for these pharma companies to hire an ex-FDA official to have an expert keep an eye on compliance? Or is it just plainly too expensive to ensure compliance and so is worth the risk of non-compliance?

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In my view, the hoopla about R&D spend is one of those false trails that take you nowhere. The metric that matters is only ans only the number of new filings. Yes - R&D can be a forward looking indicator compared to filings that’s backward looking but cross company comparison is meaningless. It depends on culture, breadth of business and ability to sweat the assets.

Essentially there is no straight cause and effect that I have seen so far…

I don’t like the fact that the company didn’t disclose that FORM 483 was issued. While Sun Pharma (which was inspected around the same time) disclosed to the exchange relatively promptly. It doesn’t reflect too well on the management.

Disc: Invested (<5% capital on a technical setup)

What is even more disturbing is news like this https://www.moneycontrol.com/news/business/aurobindo-pharma-llc-recalls-over-1-5-million-injections-from-us-over-lack-of-assurance-of-sterility-2565749.html
I find it incredible that a company of the size and reputation of Aurobindo, should not be able to maintain basic sterility issues. I am invested in this company for the last four years profitably, but issues like these, regardless of financials and R&D and all the rest are making me seriously re-consider what this company is up to. Its like the pharma equivalent of Volvo.

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http://www.aurobindo.com/docs/annual-reports/Q4FY18%20Earnings%20Presentation_28%20May%202018.pdf

Aurobindo posted decent numbers. Q4 revenue up by 11.2%, EBITDA up by 11.5%. EBITDA Margin at 19.9%. Net profit was flat due to higher depreciation.

Aurobindo seems to maintaining profitability compared to peers even when prices are falling in the US market (It has 45% of its sales in US as per presentation dated March). To my mind this is a visible moat of the Company whether it is by way of lower costs of production, better compliance to regulations or right product mix.

Unfortunately Mr Market does not seem to be having this view as Aurobindo is trading at TTM PE of around 14-15 times only. One reason I can think of is very high dependence on saturated markets of US and EU with growth markets comprising only 5% of its Revenue.

Also, I could not attend todays concall since it was scheduled at 8:30 AM. Requesting members for views and keys outcome from Concall in case any one attended. Thanks.

Disclosure: Slowly accumulating this share since 2016

aurobindo’s R&D expenses are very less at ~4% of sales. R&D expenses are much higher for other pharma companies which drags their profit in the short term but helps in growth . Also other big indian pharma like Lupin & sun has a better complex generics pipeline compared to aurobindo which gives them better earnings visibility in the long term . This is the reason for lesser P/E multiple for aurobindo compared to other pharma companies

Disc : invested in auro & actively tracking Lupin for a better price to enter :slight_smile:

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