Anand Rathi: Aurobindo Pharma Still undervalued; initiate with Buy

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Aurobindo Pharma
Still undervalued; initiate with Buy
We initiate coverage on Aurobindo Pharma with Buy and target
price of `1,560. We are positive on Aurobindo mainly owing to
our expectation of strong growth momentum, rise in number of
licensing deals, easing leverage and attractive valuations.
 Significant growth potential. Over 1,100 dossier filings globally,
126 ANDA approvals and ~50% unutilised formulations capacity
provide significant growth potential. We expect Aurobindo to
report 17.5% revenue CAGR over FY10-13e (conservative basis).
 Dossier licensing and supply deals add visibility. Aurobindo’s
new business model involves foray into dossier licensing and supply
contracts with MNCs such as Pfizer and Astra Zeneca that provide
upfront income (`1.5bn each over FY11, FY12, FY13) and add
growth visibility via supply contracts (to contribute 19% of CAGR).
 Easing financial leverage. Aurobindo’s D/E has reduced to
1.2x in FY10 from 1.8x in FY09 and is likely to further dip to 0.5x
in FY13e led by strong growth. We estimate net profit CAGR of
17% (24.9% ex dossier licensing income) over FY10-13e.
 Valuations. At CMP, the stock trades at 12.8x FY11e and 10.1x
FY12e earnings. Current valuations are at +50% discount to large-cap
peers and 20% discount to its past 5-year average (14.5x). We believe
that the discount is unjustified, given strong growth visibility and
improving balance sheet. Delay or failure in execution of supply
contracts is the key downside risk as we expect 19% growth from
these contracts.